Joseph Krist

Publisher

___________________________________________________________________

ISSUE OF THE WEEK

$600,000,000*

Florida Development Finance Corporation

Surface Transportation Facility Revenue Bonds

(Brightline Passenger Rail Project — South Segment), Series 2017

It has taken some three years, numerous court challenges, and now the prospect of a tax reform bill which would eliminate the proposed financing but the forces behind the high speed rail project on Florida’s east coast may finally partially achieve their goal of tax exempt financing for their project. The developers of the All Aboard Florida project – now known as the Brightline – have long sought up to $1.7 billion of tax exempt financing for this speculative venture. The financing on tap will achieve some 35% of that goal.

 

The proposed financing will reimburse the developers for that portion of the cost of construction of the segment of the line from Miami to West Palm Beach. That segment has seen the conclusion of construction and the line is now in the process of testing prior to operations. They have not gone off necessarily smoothly – a Brightline train derailed during testing earlier this year, causing more than $400,000 of damage and recently a woman was killed by a train during testing.

We acknowledge that the completion of construction removes a significant risk from the analysis but we remain highly skeptical about the line’s ultimate financial success. We note that the completed section only involves three stations – the terminals at Miami and West Palm Beach and the intermediate stop in Fort Lauderdale. We believe that successful completion through to Orlando remains essential to the project.

We are always extremely wary of demand projections. As hard as they may try, these surveys always seem to capture a level of optimism and support in the abstract that is ultimately hard to actually quantify. We note that the projections are characterized as “being investment grade with respect to accuracy, reliability, and credibility”. But these are the characterizations of the consultant rather than an outside reviewer. The demand study acknowledges that the project represents “an entirely new type of service for the region” with “unique features”.

We note that time savings seem to be the primary motivation for demand for the service. Our experience tells us that the perception of the value of time savings is almost always overestimated and that the results of the surveys to determine this value are often influenced by the timing and circumstances under which the surveys were taken. We also note that this project – which assumes 1 million trips a day on average – expects the novelty of the service and its attractiveness to tourists to “induce demand”. we are always wary of concepts like “induced demand” when we evaluate new projects. We note the lack of success for other “novel” services in tourist areas financed in the municipal bond space.

We also have to ask whether the projections for the project sufficiently address the potential impact of technological change on the transportation sector. Is it even possible to accurately model the success and timing of the emergence of transportation as a service? Will self driving cars offset the perceived inconveniences of driving versus high speed rail? Do the projections account for the allure of timing one’s own travel versus the structure of a fixed schedule? Does emerging road management technology combined with emerging auto technology reduce the time saving component and render the estimates of demand irrelevant?

We do not purport to answer these questions here. We do believe that these questions reflect a greater level of uncertainty into the investment analysis that they require a higher level of skepticism than the developers agree is warranted. What follows from this is the belief that any investment requires a level of current income compensation that is most likely in excess of what the project can support. We would therefore – based on our long experience with speculative startup transportation credits – respectfully suggest that there are better investments for the overwhelming majority of municipal bond investors.

___________________________________________________________________

FEDERAL HIGHWAY FUNDING CONTINUES ON UNCERTAIN PATH

The board of directors of the American Association of State Highway and Transportation Officials called on Congress to stop reducing federal highway budget authority that state agencies use to bid out transportation projects, saying this “budgetary artifice” disrupts their project planning. The resolution they unanimously approved makes the case that Congress effectively approves one level of investment in federal-aid highway projects in multiyear surface transportation legislation but then sometimes whittles parts of it away again in subsequent appropriations bills.

In spite of this resolution, President Trump’s disaster relief supplemental budget request to Congress for $44 billion includes a proposal to rescind $1 billion in states’ unused federal highway contract authority. The provision reflects a big, $7.6 billion rescission effective July 2020 of unused, accumulated contract authority that might be on the books of state DOTs at that time, with the amounts to be proportionally stripped out of a certain group of federal programs that include those that pay for new highways and bridges.

Congress in the Fixing America’s Surface Transportation Act in December 2015 approved the first new long-term surface transportation authorization in a decade, “which signaled its commitment to ensure predictable, stable federal funding between 2016 and 2020.” At the same time, the bill included the rescission provisions. Since lawmakers had fully funded the entire five-year bill with specified revenue streams, transportation officials said Congress was using the highway program rescission to help cover unrelated federal spending.

Congress in its fiscal 2017 full-year spending bill lopped off $857 million more that state DOTs had to absorb this past June, with very little notice. And now a House appropriations measure for the 2018 budget year that starts Oct. 1 would strip out another $800 million in project contract authority, while the Senate version proposes no such rescission.

Instead of receiving their funds through block grants to apply how they wish, state DOTs are apportioned federal funds through contract authority that is subdivided to the dozens of active qualifying accounts, for such things as safety and construction funds. When Congress rescinds some unused contract authority, state planners have to go back through and see how they can apply the remaining funds to projects they had in the pipeline, and which ones they might have to delay. And when Congress applies a rescission only to certain highway program accounts, state officials find they might have to cut more deeply into how they planned to use the funding.

The state CEOs urged lawmakers to take several steps. First, they asked that Congress remove in any final 2018 appropriations bill the House’s proposed $800 million rescission. In addition, they urged Congress “to repeal the $7.6 billion rescission scheduled for July 2020 under the FAST Act.” The agency chiefs said if lawmakers cannot find acceptable resources or “pay-fors” to prevent these rescissions, that Congress should at least provide state DOTs with “maximum flexibility” to apply the cuts as each DOT needs across all federal highway program accounts. State officials also called on Congress to end that practice for the future – “ceasing its reliance on highway contract authority rescissions as an offset for unrelated programs” – so that it does not continue to recur.

These sorts of provisions will take on greater importance if tax reform goes through with its restrictions on municipal bonds and the revenues to support them are included. The introduction of uncertainty into the funding process makes it harder to evaluate debt capacity and revenue requirements which will complicate the analysis of transportation related credits.

MINNESOTA COP PAYMENT CASE

On May 25, 2017, the Minnesota Legislature  adjourned, ending the special session that began on May 23, 2017. On May 30, 2017, the Governor vetoed line-item appropriations to the Legislature for its biennial budget. By the last day of the 2017 regular session, May 22, 2017, most of the final budget bills for the next biennium—fiscal years 2018–2019—had not been presented to the Governor. Legislative leaders and the Governor agreed that the special session would “be confined to the outstanding budget bills and the tax bill,” the bills would be “voted upon or passed by either body within one legislative day,” and the Legislature would “adjourn the Special Session no later than 7:00 a.m. on May 24, 2017.”

One of the bills passed during the special session and presented on May 26 was the state government appropriations bill, Senate File No. 1. In article I, section 14 of this bill, the Legislature appropriated funds to the Department of Revenue for that agency’s biennial budget. Section 2 of Senate File No. 1 provided appropriations to the Legislature for each fiscal year (FY) in the next biennium. The Governor notified the Senate that he had “line-item veto[ed] the appropriations for the Senate and House of Representatives to bring the Leaders back to the table to negotiate provisions” in three bills that the Governor had just signed and that subsequently became law.

Specifically, the Governor said that there were provisions in the “Tax, Education and Public Safety” bills that he could not “accept.” He explained to legislative leaders that he “veto[ed] the appropriations for the House and Senate” for the next biennium because the Legislature’s “job has not been satisfactorily completed.” He offered to call a special session if the Legislature would agree to “remove” or “re-negotiate” the provisions the Governor found objectionable in the Tax, Education, and Public Safety bills.

The Governor was using the veto to make it difficult if not impossible for the Legislature to operate in order to induce the Legislature to negotiate terms of the budget legislation. On June 13, 2017, the Legislature filed a complaint in Ramsey County District Court.   In count one, the complaint sought a declaration that the Governor’s line-item vetoes were unconstitutional as a violation of the Separation-of-Powers clause in the Minnesota Constitution. The Governor and the Legislature asked the district court to enter a temporary injunction directing MMB to “take all steps necessary” to fund the Legislature based on “fiscal year 2017 base general fund funding” during the appeal period—defined as completion of all appellate review and issuance of the appellate court’s mandate—or until October 1, 2017, whichever occurred first.

In July, the district court declared the Governor’s line-item vetoes null and void as a violation of the Separation-of-Powers clause in Article III because they “impermissibly prevent[ed] the Legislature from exercising its constitutional powers and duties.” the court concluded that, by vetoing the appropriations for the Legislature, the Governor’s line-item vetoes “both nullified a branch of government and refashioned the line-item veto as a tool to secure the repeal or  modification  of  policy legislation unrelated to the vetoed  appropriation,” The court therefore concluded that the appropriations struck by the Governor’s line- item vetoes “became law with the rest of the bill.”

The questions raised in this case involve powers the Minnesota Constitution confers on the State’s three branches of government. The district court found that the Governor’s line-item vetoes were applied to an “item of appropriation and those sums were “dedicated to a specific purpose,” funding the Senate and the House in the 2018–2019 biennium. Article IV of the state constitution, an article that generally addresses the powers of the Legislative Branch says “If a bill presented to the governor contains several items of appropriation of money, he may veto one or more of the items while approving the bill.”. According to the Supreme Court, the plain language of Article IV places only one substantive limit on the line-item veto power, specifically, the requirement that the veto be made as to an “item” of “appropriation.”  It held that the Governor’s line-item vetoes of the Legislature’s biennial budget appropriations did not violate Article IV, Section 23 of the Minnesota Constitution. It also noted that the language of Article XI, Section 1 of the Minnesota Constitution is unambiguous: “No money shall be paid out of the treasury of this state except in pursuance of an appropriation by law.” It also notes that Article XI, Section 1 of the Minnesota Constitution does not permit judicially ordered funding for the Legislative Branch in the absence of an appropriation.

So why does a municipal bond investor care about a dispute between the Governor and the Legislature that does not speak directly to a municipal bond issue? Fair question. The concern is that the decision clearly establishes that the Governor may use his line item veto to veto appropriations by the Legislature. The Legislature asserts that the Governor improperly vetoed its biennial appropriations in an effort to coerce concessions on tax and policy provisions. The Governor counters that his line-item veto power was the only tool he could use to respond to the Legislature’s conditional appropriation of funding for the Department of Revenue, which he argues was intended to coerce his agreement to the tax and policy provisions. The Court said that the parties’ dispute about coercion essentially asks the court to assess, weigh, and judge the motives of co-equal branches of government engaged in a quintessentially political process. It added that resolution of . . . budget issues by the other branches through the political process is preferable to our issuance of an advisory opinion adjudicating separation of powers issues that are not currently active and may not arise in the future.”

So investors in securities backed by appropriations are concerned that they can now get caught up in other political issues which could hold up the full and timely payment of their obligations. Frankly, this is always a risk in any appropriation backed debt but it is not often that a ruling is issued by a state court which seems to cause the courts to be reluctant to rule in favor of debt holders. It concluded that principles of judicial restraint and respect for our coordinate branches of government dictate that it refrain from deciding whether the Governor’s exercise of the line-item veto power over the Legislature’s appropriations to itself violated Article III by unconstitutionally coercing the Legislature.

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

Publisher

___________________________________________________________________

ISSUE OF THE WEEK

$600,000,000

Florida Development Finance Corporation

Surface Transportation Facility Revenue Bonds

(Brightline Passenger Rail Project — South Segment), Series 2017

It has taken some three years, numerous court challenges, and now the prospect of a tax reform bill which would eliminate the proposed financing but the forces behind the high speed rail project on Florida’s east coast may finally partially achieve their goal of tax exempt financing for their project. The developers of the All Aboard Florida project – now known as the Brightline – have long sought up to $1.7 billion of tax exempt financing for this speculative venture. The financing on tap will achieve some 35% of that goal.

The proposed financing will reimburse the developers for that portion of the cost of construction of the segment of the line from Miami to West Palm Beach. That segment has seen the conclusion of construction and the line is now in the process of testing prior to operations. They have not gone off necessarily smoothly – a Brightline train derailed during testing earlier this year, causing more than $400,000 of damage and recently a woman was killed by a train during testing.

We acknowledge that the completion of construction removes a significant risk from the analysis but we remain highly skeptical about the line’s ultimate financial success. We note that the completed section only involves three stations – the terminals at Miami and West Palm Beach and the intermediate stop in Fort Lauderdale. We believe that successful completion through to Orlando remains essential to the project.

We are always extremely wary of demand projections. As hard as they may try, these surveys always seem to capture a level of optimism and support in the abstract that is ultimately hard to actually quantify. We note that the projections are characterized as “being investment grade with respect to accuracy, reliability, and credibility”. But these are the characterizations of the consultant rather than an outside reviewer. The demand study acknowledges that the project represents “an entirely new type of service for the region” with “unique features”.

We note that time savings seem to be the primary motivation for demand for the service. Our experience tells us that the perception of the value of time savings is almost always overestimated and that the results of the surveys to determine this value are often influenced by the timing and circumstances under which the surveys were taken. We also note that this project – which assumes 1 million trips a day on average – expects the novelty of the service and its attractiveness to tourists to “induce demand”. we are always wary of concepts like “induced demand” when we evaluate new projects. We note the lack of success for other “novel” services in tourist areas financed in the municipal bond space.

We also have to ask whether the projections for the project sufficiently address the potential impact of technological change on the transportation sector. Is it even possible to accurately model the success and timing of the emergence of transportation as a service? Will self driving cars offset the perceived inconveniences of driving versus high speed rail? Do the projections account for the allure of timing one’s own travel versus the structure of a fixed schedule? Does emerging road management technology combined with emerging auto technology reduce the time saving component and render the estimates of demand irrelevant?

We do not purport to answer these questions here. We do believe that these questions reflect a greater level of uncertainty into the investment analysis that they require a higher level of skepticism than the developers agree is warranted. What follows from this is the belief that any investment requires a level of current income compensation that is most likely in excess of what the project can support. We would therefore – based on our long experience with speculative startup transportation credits – respectfully suggest that there are better investments for the overwhelming majority of municipal bond investors.

___________________________________________________________________

FEDERAL HIGHWAY FUNDING CONTINUES ON UNCERTAIN PATH

The board of directors of the American Association of State Highway and Transportation Officials called on Congress to stop reducing federal highway budget authority that state agencies use to bid out transportation projects, saying this “budgetary artifice” disrupts their project planning. The resolution they unanimously approved makes the case that Congress effectively approves one level of investment in federal-aid highway projects in multiyear surface transportation legislation but then sometimes whittles parts of it away again in subsequent appropriations bills.

In spite of this resolution, President Trump’s disaster relief supplemental budget request to Congress for $44 billion includes a proposal to rescind $1 billion in states’ unused federal highway contract authority. The provision reflects a big, $7.6 billion rescission effective July 2020 of unused, accumulated contract authority that might be on the books of state DOTs at that time, with the amounts to be proportionally stripped out of a certain group of federal programs that include those that pay for new highways and bridges.

Congress in the Fixing America’s Surface Transportation Act in December 2015 approved the first new long-term surface transportation authorization in a decade, “which signaled its commitment to ensure predictable, stable federal funding between 2016 and 2020.” At the same time, the bill included the rescission provisions. Since lawmakers had fully funded the entire five-year bill with specified revenue streams, transportation officials said Congress was using the highway program rescission to help cover unrelated federal spending.

Congress in its fiscal 2017 full-year spending bill lopped off $857 million more that state DOTs had to absorb this past June, with very little notice. And now a House appropriations measure for the 2018 budget year that starts Oct. 1 would strip out another $800 million in project contract authority, while the Senate version proposes no such rescission.

Instead of receiving their funds through block grants to apply how they wish, state DOTs are apportioned federal funds through contract authority that is subdivided to the dozens of active qualifying accounts, for such things as safety and construction funds. When Congress rescinds some unused contract authority, state planners have to go back through and see how they can apply the remaining funds to projects they had in the pipeline, and which ones they might have to delay. And when Congress applies a rescission only to certain highway program accounts, state officials find they might have to cut more deeply into how they planned to use the funding.

The state CEOs urged lawmakers to take several steps. First, they asked that Congress remove in any final 2018 appropriations bill the House’s proposed $800 million rescission. In addition, they urged Congress “to repeal the $7.6 billion rescission scheduled for July 2020 under the FAST Act.” The agency chiefs said if lawmakers cannot find acceptable resources or “pay-fors” to prevent these rescissions, that Congress should at least provide state DOTs with “maximum flexibility” to apply the cuts as each DOT needs across all federal highway program accounts. State officials also called on Congress to end that practice for the future – “ceasing its reliance on highway contract authority rescissions as an offset for unrelated programs” – so that it does not continue to recur.

These sorts of provisions will take on greater importance if tax reform goes through with its restrictions on municipal bonds and the revenues to support them are included. The introduction of uncertainty into the funding process makes it harder to evaluate debt capacity and revenue requirements which will complicate the analysis of transportation related credits.

MINNESOTA COP PAYMENT CASE

On May 25, 2017, the Minnesota Legislature  adjourned, ending the special session that began on May 23, 2017. On May 30, 2017, the Governor vetoed line-item appropriations to the Legislature for its biennial budget. By the last day of the 2017 regular session, May 22, 2017, most of the final budget bills for the next biennium—fiscal years 2018–2019—had not been presented to the Governor. Legislative leaders and the Governor agreed that the special session would “be confined to the outstanding budget bills and the tax bill,” the bills would be “voted upon or passed by either body within one legislative day,” and the Legislature would “adjourn the Special Session no later than 7:00 a.m. on May 24, 2017.”

One of the bills passed during the special session and presented on May 26 was the state government appropriations bill, Senate File No. 1. In article I, section 14 of this bill, the Legislature appropriated funds to the Department of Revenue for that agency’s biennial budget. Section 2 of Senate File No. 1 provided appropriations to the Legislature for each fiscal year (FY) in the next biennium. The Governor notified the Senate that he had “line-item veto[ed] the appropriations for the Senate and House of Representatives to bring the Leaders back to the table to negotiate provisions” in three bills that the Governor had just signed and that subsequently became law.

Specifically, the Governor said that there were provisions in the “Tax, Education and Public Safety” bills that he could not “accept.” He explained to legislative leaders that he “veto[ed] the appropriations for the House and Senate” for the next biennium because the Legislature’s “job has not been satisfactorily completed.” He offered to call a special session if the Legislature would agree to “remove” or “re-negotiate” the provisions the Governor found objectionable in the Tax, Education, and Public Safety bills.

The Governor was using the veto to make it difficult if not impossible for the Legislature to operate in order to induce the Legislature to negotiate terms of the budget legislation. On June 13, 2017, the Legislature filed a complaint in Ramsey County District Court.   In count one, the complaint sought a declaration that the Governor’s line-item vetoes were unconstitutional as a violation of the Separation-of-Powers clause in the Minnesota Constitution. The Governor and the Legislature asked the district court to enter a temporary injunction directing MMB to “take all steps necessary” to fund the Legislature based on “fiscal year 2017 base general fund funding” during the appeal period—defined as completion of all appellate review and issuance of the appellate court’s mandate—or until October 1, 2017, whichever occurred first.

In July, the district court declared the Governor’s line-item vetoes null and void as a violation of the Separation-of-Powers clause in Article III because they “impermissibly prevent[ed] the Legislature from exercising its constitutional powers and duties.” the court concluded that, by vetoing the appropriations for the Legislature, the Governor’s line-item vetoes “both nullified a branch of government and refashioned the line-item veto as a tool to secure the repeal or  modification  of  policy legislation unrelated to the vetoed  appropriation,” The court therefore concluded that the appropriations struck by the Governor’s line- item vetoes “became law with the rest of the bill.”

The questions raised in this case involve powers the Minnesota Constitution confers on the State’s three branches of government. The district court found that the Governor’s line-item vetoes were applied to an “item of appropriation and those sums were “dedicated to a specific purpose,” funding the Senate and the House in the 2018–2019 biennium. Article IV of the state constitution, an article that generally addresses the powers of the Legislative Branch says “If a bill presented to the governor contains several items of appropriation of money, he may veto one or more of the items while approving the bill.”. According to the Supreme Court, the plain language of Article IV places only one substantive limit on the line-item veto power, specifically, the requirement that the veto be made as to an “item” of “appropriation.”  It held that the Governor’s line-item vetoes of the Legislature’s biennial budget appropriations did not violate Article IV, Section 23 of the Minnesota Constitution. It also noted that the language of Article XI, Section 1 of the Minnesota Constitution is unambiguous: “No money shall be paid out of the treasury of this state except in pursuance of an appropriation by law.” It also notes that Article XI, Section 1 of the Minnesota Constitution does not permit judicially ordered funding for the Legislative Branch in the absence of an appropriation.

So why does a municipal bond investor care about a dispute between the Governor and the Legislature that does not speak directly to a municipal bond issue? Fair question. The concern is that the decision clearly establishes that the Governor may use his line item veto to veto appropriations by the Legislature. The Legislature asserts that the Governor improperly vetoed its biennial appropriations in an effort to coerce concessions on tax and policy provisions. The Governor counters that his line-item veto power was the only tool he could use to respond to the Legislature’s conditional appropriation of funding for the Department of Revenue, which he argues was intended to coerce his agreement to the tax and policy provisions. The Court said that the parties’ dispute about coercion essentially asks the court to assess, weigh, and judge the motives of co-equal branches of government engaged in a quintessentially political process. It added that resolution of . . . budget issues by the other branches through the political process is preferable to our issuance of an advisory opinion adjudicating separation of powers issues that are not currently active and may not arise in the future.”

So investors in securities backed by appropriations are concerned that they can now get caught up in other political issues which could hold up the full and timely payment of their obligations. Frankly, this is always a risk in any appropriation backed debt but it is not often that a ruling is issued by a state court which seems to cause the courts to be reluctant to rule in favor of debt holders. It concluded that principles of judicial restraint and respect for our coordinate branches of government dictate that it refrain from deciding whether the Governor’s exercise of the line-item veto power over the Legislature’s appropriations to itself violated Article III by unconstitutionally coercing the Legislature.

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

Publisher

ISSUE OF THE WEEK

New York’s Metropolitan Transportation Authority plans to issue $2 billion of transportation revenue bonds this week. The effort comes coincident with the publication of a scathing report by the New York Times highlighting the long process of political interference in the Authority’s operations. The report comes as the Authority faces its first decline in ridership in decades after a year of highly visible and seemingly regular service interruptions. While the issues facing the Authority are substantial, it does not appear that these issues have a substantial negative impact on the Authority’s bond credit.

Just last week, Moody’s reaffirmed its A! rating with a stable outlook . It cited ” MTA’s strong operating environment, including the healthy service area economic growth and sound financial condition of supporting governments New York State (Aa1 stable) and New York City (Aa2 stable). The A1 also reflects MTA’s satisfactory finances, supported by sound budget management, governance, and planning, as well as bondholder protections provided by the gross pledge of a highly diversified revenue stream. The A1 also acknowledges the high fixed costs, substantial capital program, and the financial and operational challenges posed by strong collective bargaining units and a massive, aging transportation infrastructure.”

That is not to say that the Authority’s significant reliance on its bonding capacity to fund its capital needs in the wake of consistent reductions in annual funding subsidies from state and local sources do not have implications for the ongoing value. We try not to let our familiarity with the MTA over six decades of ridership color our view of the credit. When one is stuck in a tunnel or packed in an increasingly unreliable subway car, it’s hard to have the words “investment grade” be one’s first thought. Nonetheless, the issues raised in the report highlight valid issues which have been raised about how legislative decisions made by both the State and City of New York which have reduced current funding for MTA operations and capital needs.

________________________________________________________________________________

PUERTO RICO HEARINGS REVEAL CONGRESSIONAL GAME PLAN

“Puerto Rico has the potential of being the Hong Kong of the United States, where businesses would flood in there.” Louie Gohmert (R) TX

“Maria gives us the opportunity to bring Puerto Rico’s infrastructure into the 21st century. How can innovative energy technology, such as fuel cells that utilize our nation’s resource of clean-burning natural gas, be used to revitalize the Puerto Rico energy grid?” Rep. Glenn Thompson, R-Penn. Those were just two of the less than realistic comments made by members of the House committee overseeing the Commonwealth of Puerto Rico.

Committee Chair Bob Bishop stated on Tuesday, the main purpose of this week’s hearing was for the Natural Resources Committee to affirm it has the fiscal control board’s back in the bankruptcy-like court proceedings where Puerto Rico’s financial future now sits. The hearings occurred in the wake of the court decision which effectively vetoed the appointment of a chief executive for PREPA, the Commonwealth’s troubled electric utility.

One cannot help but notice the lack of references to the well-being of the citizens, of the role of the rule of law in terms of repayment of debt or the potential for developing mechanisms for supporting efforts to prevent crises like this from happening again. Instead, many of the members saw their prime duty as that of appealing to interest groups in particular the fossil fuel industry. It looked by the end of the week that the answer to the island’s major problems were imported liquefied natural gas.

It looks now that the committee’s greatest objection to the performance of the executive director of PREPA was not the state of the power grid post-Maria but his apparent reluctance to adopt gas fueled generation. One clearly got the sense that the PROMESA board was complicit in this and that it’s attempt to appoint a so-called Chief Technology Officer to run PREPA was a thinly veiled attempt to put someone in the pocket of the natural gas industry in charge.

The hearing bode poorly for the concept of a well thought out plan of recovery for the island. It is not a surprise that Puerto Rico will not get the amount of money it is asking for nor is it a surprise that there will be significant strings attached. It repeats a pattern that emerged in the aftermath of Katrina. The extension of federal recovery aid then was accompanied by efforts to achieve political/policy goals rather than a reasonably quick restoration of life for thousands of displaced residents. We try to avoid politics as much as possible in our analysis but this effort to impose policies through the extension of recovery aid is much more likely to happen when the impacted area is poor and the party in power is “conservative”.

The process has claimed its first major scalp with the announcement that PREPA’s executive director, Ricardo Ramos, was resigning. In his acceptance of the resignation, the Governor said that the ED’s continuance in his role would be a distraction. The hearings this week hammered on the director for his response in reaching out for outside assistance as well as the well publicized Whitefish contract debacle.

In terms of the execution of a PREPA debt restructuring, we see the replacement of the executive director as having no impact on the timetable or amount of any agreement on the debt.

COULD SANTEE COOPER BECOME A REGULATED UTILITY?

It has happened before to other municipal utilities (LIPA, e.g.) but it would be a negative turn of events for the South Carolina Public Service Authority Credit if proposed legislation is enacted by the South Carolina legislature. The State of South Carolina House of Representatives filed a bill for the 2018 legislative session that would require the South Carolina Public Service Authority (Santee Cooper, A1 negative) to gain approval from the state Public Service Commission before changing rates. Currently, state-owned Santee Cooper, which provides electricity and other services, is self-regulated. The legislation also would preclude Santee Cooper from implementing new rates or altering current ones to cover any costs related to its abandonment of Summer Nuclear Station Units 2 and 3.

A foundational aspect of Santee Cooper’s credit quality is a record of timely, self-regulated rate setting that allows the utility to maintain sound financial metrics such as debt service coverage while providing competitive electricity rates. Regulatory oversight would add an additional step and potentially restrict rate raising. With the legislation calling for a prohibition on Santee Cooper’s ability to recover costs related to the abandoned Sumner nuclear project, debt service payments on about $4 billion of outstanding nuclear-related revenue bonds becomes more difficult. Santee Cooper’s current plan is to recover such debt service costs by raising rates sometime after 2021.

The proposal comes before the full impact of Santee Cooper’s rate mitigation plan through 2021 can be implemented.  Before 2021, Santee Cooper planned to use an $898.7 million upfront cash payment it received from the monetization of the Toshiba Corporation parental guarantee on the nuclear project to offset some of the costs associated with the abandoned project. Santee Cooper, which serves both wholesale and retail customers, has announced a cost-reduction plan aimed at mitigating the size of any future rate increase needed to recover Summer 2 and 3 costs.

RATING IMPACT OF HARVEY BECOMES CLEARER

Moody’s Investors Service has concluded rating reviews on 18 issuers that were affected by Hurricane Harvey. The ratings were placed under review for downgrade on September 22nd due to the potential for significant economic and revenue loss associated with damage caused by Hurricane Harvey and the related rainfall that inundated the region for several days. The rating process determined that there was no effective negative impact on the credits. The credits that were the subject of the announcement include:

CNP Utility District, TX (A1/NOO)

Corinthian Point Municipal Utility District 2, TX (Baa3/STA)

Cypress-Klein Utility District, TX (A1/NOO)

Fort Bend County Municipal Utility District 144, TX (Baa2/STA)

Fort Bend County Municipal Utility District 25, TX (A2/NOO)

Fort Bend County Municipal Utility District 117, TX (A2/NOO)

Harris County Municipal Utility District 109, TX (A2/NOO)

Harris County Municipal Utility District 153, TX (A1/NOO)

Kleinwood Municipal Utility District, TX (A2/NOO)

Montgomery County Municipal Utility District 94, TX (A3/NOO)

Montgomery County Municipal Utility District 95, TX (Baa2/STA) Montgomery County Municipal Utility District 95, TX (Baa2/STA)

Montgomery County Municipal Utility District 46 (Aa3/NOO)

Montgomery County Municipal Utility District 9, TX (A1/NOO)

Montgomery County Municipal Utility District 90, TX (Baa2/STA)

Oakmont Public Utility District, TX (A2/NOO)

Pecan Grove Municipal Utility District, TX (A1/NOO)

Varner Creek Utility District, TX (Baa1/NOO)

DALLAS RATING AFFIRMED

This was a difficult year for the City of Dallas, TX. It confronted fiscal difficulties associated with its mounting unfunded pension liability position. After difficult negotiation with its employee labor unions and a complex legislative process at the state level, a resolution to at least a part of the City’s pension funding schemes was obtained. Now that those pieces are in place, the City’s ratings which were on negative outlook by Moody’s have been reviewed and reaffirmed at A1 with a stable outlook.

According to Moody’s, “the rating incorporates the positive effects of pension reform (House Bill 3158) on the city’s near to medium term financial position, specifically the significant reduction in unfunded liabilities associated with the Dallas Police and Fire Pension Fund, as well as the city’s ability to integrate higher pension contributions into its biennial budget. The rating additionally reflects the fact that even with reform, the pension burden relative to operating revenues and the tax base remains elevated and an outlier when compared to peers. Further, pension contributions, while higher, are still below a “tread water” level and we expect the liabilities to grow. The A1 rating also factors in the city’s dynamic economy, adequate reserves and manageable debt burden.”

ENJOY THANKSGIVING!

On the busiest travel holiday of the year (yes, bigger than Christmas) we wish you safe travel. Enjoy your time with family and/or friends and whatever your favorite holiday feast might be.

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

Publisher

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ISSUE OF THE WEEK

$922,300,000

CHICAGO BOARD OF EDUCATION

General Obligation Refunding Bonds

Moody’s: B3

The Board is trying to take advantage of the generally favorable rate environment and a halt in the long term trend of credit decline to refund a significant amount of outstanding GO debt. In September, Moody’s reviewed its rating in the light of the State’s first budget agreement in three years. It sustained the B3 rating and revised the outlook to stable from negative.

The City’s general economic health is reflected in the tax base which the Board and the City share. In combination with  the state budget accord, combined property taxes and state aid are estimated to increase by approximately $500 million for fiscal 2018. For fiscal 2018, CPS revenues and expenditures will nearly be in balance after several years of very large shortfalls.

Over the long run, a 2% growth in annual expenses would translate to increased spending of some $120 million annually. This will be hard to achieve given the likelihood of increasing pension contributions and debt service costs. This does not take into account the potential for higher wage costs as the result of its contentious relationship with its employee unions. In fiscal 2018, the district will receive more than $300 million in increased state aid owing to a gain from a new funding formula and state payment of the district’s normal pension cost. However, Illinois continues to have ongoing financial and governance challenges, and the state’s willingness and ability to meet future funding targets is uncertain.

The Board could try to raise taxes but this would coincide with other local entities such as Chicago and Cook County also raising property and sales taxes. There are practical limitations on continually raising taxes on the same group of taxpayers.

Clearly this is a credit that on its own is not for the faint of heart. More than most of the other credits sharing the Chicago tax base, it relies on a more difficult management and pension situation and is the most prominent target for those in Springfield who have a negative bias against the City. As a result, it will have the hardest time recovering its credit position over an extended time period.

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PUERTO RICO

Puerto Rico’s financial control board published the first report on the investigation underway into the commonwealth’s debt. The report states that 84 notifications of document preservation have already been sent in relation to public debt issuance made in the past 20 years. Issuing entities, advisers, credit rating companies and underwriting institutions, among others, have received them. On Oct. 18, the board turned the probe into a formal procedure, as defined by its investigation protocol, given the need to use subpoenas to carry out the effort.

Kobre & Kim, a firm specializing in disputes and investigations,  was retained on Sept. 1 to investigate all the factors that triggered the fiscal crisis in Puerto Rico, as well as all public debt transactions the government has made, as requested by the board. This includes the practices employed in the purchase and sale of Puerto Rico and its public corporations’ bonds, and the associated disclosures to market participants. To date, the firm has examined documentation related to public debt issuance since 1990, the government’s certified fiscal plan and a government liquidity analysis conducted by accounting firm and board adviser Ernst & Young. Documents have also been requested of Puerto Rico’s Fiscal Agency and Financial Advisory Authority.

The firm said it does not expect to have a final report until the end of March, and warned it may be delayed due to the complications that could arise in the aftermath of Hurricane Maria. The report also indicates that priority in the investigation has focused on those aspects that affect electricity and water services and other critical infrastructure affected by the major hurricane.

As for PREPA, the government of the Commonwealth is moving forward with steps to void its controversial contract with Whitefish Energy to repair the power grid. The Commonwealth will instead avail itself of the mutual aid program which will allow it to employ crews from utilities in Florida and New York to do the work. A U.S. Congress committee, the Office of the Inspector General (OIG), and FEMA are all investigating the contract. The FBI is conducting its own investigation.

On the economic front, a report by Hunter College’s Center for Puerto Rican Studies projects that outmigration from the island as a result of Hurricane Maria could be as high as 14% of the local population in the next two years. Researchers project that the majority of local residents will move to Florida, followed by Pennsylvania, Texas, New York and New Jersey. Florida alone could face an influx of as many as 164,000 new residents from Puerto Rico in the next two years. The island’s United Retailers Association says ten percent, or about 5,000 of Puerto Rico’s 50,000 small and midsize businesses will not operate again after the devastation left by Hurricane Maria. A survey conducted by the organization revealed, more than a month after Hurricane Maria’s passage, that about 35% of small and midsize businesses have not resumed operations because they do not have electricity.

The news this past week that the Federal government was implementing a new form of its Transitional Sheltering Assistance  which has been historically used to temporarily relocate displaced residents to neighboring states. In the iteration being applied to Puerto Rico, the agency is arranging charter flights for residents, beginning with those still in shelters. Destinations are as far away as New York. While FEMA does provide reimbursement for costs of return, the real impact will be to facilitate more emigration from the island and reduce the pressure to reconstruct and restore housing destroyed in the hurricane.

These grim projections have obvious negative connotations for the Commonwealth’s finances over the short and long term. Creditors are clearly taking this into account. At an investor forum in which we participated last week, investors noted selling by heretofore patient mutual fund owners of PR debt and cited prices on the Commonwealth’s benchmark 8% of 2035 general obligation bonds at dollar prices in the $25-30 range.

COURT DECISION HURTS MISSISSIPPI SCHOOL DISTRICTS

The Mississippi Supreme Court recently upheld a lower court ruling that the state legislature does not have to fully fund the Mississippi Adequate Education Program (MAEP). In August 2014, 21 school districts sued the state for $236 million of state aid shortfalls between 2010 and 2015. A Hinds County judge ruled in July 2015 that the state school funding formula did not constitute a mandate and therefore the legislature was not required to fully fund the formula. The Supreme Court supported that view.

The MAEP codifies the funding formula which has been in use since 1997 to determine state aid for local school districts, including average daily attendance, district growth, and local contributions. Mississippi’s 2018 budget allocates $2.2 billion in education funding for local school districts, roughly $214 million less than the fully funded MAEP amount. For 2009-17, the state underfunded MAEP by $1.9 billion. The number of districts which have been underfunded by at least 5% is in double digits. Mississippi school districts typically receive 40%-50% of their revenue from state aid, with the balance from local property taxes.

The support for continued declines in state support is credit negative Mississippi school districts typically receive 40%-50% of their revenue from state aid, with the balance from local property taxes. for the impacted districts. Their real ability to raise sufficient revenue from property taxes is constrained by the State’s chronically weak economy. Mississippi is the poorest state in the US. On a more general basis, the declines in school funding will make the State less economically competitive and make it more reliant on incentives and low labor costs to attract jobs, thereby making the state’s less competitive a more entrenched feature of its economy and credit.

OKLAHOMA BUDGET STRUGGLES CONTINUE

The Sooner State continues to struggle to balance its budget after the Oklahoma Supreme Court ruled that a tax on cigarettes was unconstitutional on August 10. That removed $215 million from the revenue side of the budget ledger and the legislature has since struggled to find ways to fill the resulting gap. The budget gap at 4.0% of estimated general fund spending is not huge. The tax did not pass judicial muster because it failed to garner a 75% supermajority in both legislative houses for new revenue. It also was prohibited by constitutional provisions which prohibit raising new revenue in the last five days of a session.

There is currently not sufficient legislative support to enact a revenue bill. A house budget committee passed a series of stopgap measures but these must be passed by the full houses. That is not a sure thing. So the State continues to limp along without any signs of structural balance being achieved. The difficulties are a result of its energy dependent economy and lower fossil fuel prices. The state has reduced appropriations by 5.3% ($387 million) in the three years since the peak in fiscal 2015 but there is no appetite for additional cuts. The state needs approximately $405 million of onetime fixes to balance the fiscal 2018 budget plan. The governor projects a $500 million shortfall next year. The rainy day fund currently is set to fall to just $70 million, or 1.0% of fiscal 2018 appropriations.

MORE GOVERNMENT AID FOR NUCLEAR GENERATION

After failing to approve  similar bills over two years, the Connecticut House of Representatives voted 75 to 66 for final passage of a measure to permit, not require, state energy officials to change the rules for how Dominion Energy sells electricity from its nuclear plant, Millstone. The plant has been less profitable as competing generating sources have become cheaper. Dominion has broadly hinted that without the changes it would prematurely retire the two reactors at the plant, which is the largest power plant in New England. Its output, which is the equivalent of about half the state’s needs, is sold throughout the region.

Environmental justifications reference the fact that Millstone produces nearly all of Connecticut’s zero-carbon energy, and its loss would jeopardize the state’s ability to meet its long-term goals for reducing carbon emissions. Job related arguments in favor reference the 1,500 women and men working at Millstone power station. It has been difficult to judge exactly what the plant’s economics are as Dominion has refused to provide the state with copies of proprietary documents supporting its claim of a need for financial relief, saying it was not confident a promise of confidentiality would survive a challenge under the Freedom of Information Act.

The plan continues a trend of nuclear operators seeking “subsidies” to support nuclear generating facilities which are facing increased pressure from solar and wind based generation as states seek to expand reliance on renewable energy sources.

MORE PRESSURE ON PUBLIC SCHOOLS

In Section 1202 of the tax bill is a provision that would significantly alter the terms of  something called a Coverdell account, which families have used for years to save for both private school and college. Elementary and high school expenses of up to $10,000 per year would become “qualified” expenses for 529 plans.  An individual could use $10,000 each year out of their 529 account for private school and avoid paying taxes on any previous growth. There are no income limits on who can use 529 plans, and one would be able to continue saving for college as well.

Paul Coverdell, a senator (hence the name)  in the 1990s wanted to create tax breaks for parents whose children do not attend public schools. In 2001, President George W. Bush signed a bill allowing holders of the accounts to use any earnings in them for tuition in kindergarten through 12th grade as well as college. The current proposal, initially an idea from the conservative Heritage Foundation, would end contributions to Coverdell accounts while offsetting the impact with the change to the 529 provisions.

Coverdell contributions had previously had an annual contribution cap of $2,000. The benefit was therefore somewhat limited. 529 plans have few contribution restrictions and very high limits on balances.

The chief beneficiaries would be those in the highest marginal brackets. The New York Times estimated a potential tax savings of $34,000 over 15 years of savings based on $10,000 of annual withdrawls. Effectively, that would benefit the many households who use private schools to avoid their children being exposed to the diversity of the public school system. This hurts public schools as so many states use average daily attendance as the basis for distributions of state aid and provides a competing subsdy to religiously based schools.

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

Publisher

________________________________________________________________

ISSUE OF THE WEEK

This week we focus not on a bond transaction but on what truly will the issue for the municipal bond market – tax reform. The proposal or framework that was laid out this past week for how to “reform” the tax code is a potential watershed event for our market. The numerous provisions regarding municipal bonds included in the proposal came as a real surprise to market participants. The state and local tax deduction has actually been on the table for a while. But the provisions eliminating private activity bonds, the alternative minimum tax, and advance refundings were all unexpected. We argue here that individually and in total, they represent a narrow minded philosophy which contradicts basic beliefs espoused by both the president and the congressional majority party while making it much harder for the needs of those who voted for them less achievable.

Tax reform at its best would be undertaken for the purposes of simplicity, fairness, and stimulation of the economy. It would not be undertaken to fulfill narrow partisan interests. The House bill is clearly a political document meant to be a sop to the wealthiest in the country, those who benefit from their ownership of business rather than the providers of its labor, those who hate local government, and those who believe in a more regressive tax system. It is the manifestation of the “starve the beast” philosophy against government at all levels.

We do not argue here that government is the most efficient provider of services but we do believe in the idea that some of those services are most rightly classified as public goods. That is not inconsistent with a belief that private entities have a real role to play in the provision of public services. What we are somewhat astounded by is the lack of support for private participation in the efficient provision of public goods which is reflected in this bill. Our amazement is based in the espoused philosophy of the President and the majority especially as it pertains to the renewal and development of the nation’s infrastructure.

We acknowledge that each of the targeted provisions which impact the municipal bond market have and can be the subject of abuse. We applaud for instance the proposals which would end public funding for stadiums. But we question the basis for limiting the options available to government to finance infrastructure that are inherent in the proposed bans on all private activity bonds. We question whether the reductions in revenue associated with the corporate tax cuts that will make it harder to finance projects of national benefit (mass transit, interstate transit, airports and associated facilities, environmental control at private industrial facilities) are worth the price.

The limitation on the deduction for state and local taxes to property taxes only will increase the reliance on more regressive taxes like property to finance basic local services especially schools. In so many jurisdictions, property taxes especially for schools are the greatest source of local discontent. Economics 101 questions the efficacy of taxation based on perceived wealth rather than income. It increases pressure on first time homeowners and the elderly. It does that at a time when state and local government potentially face issues from the majority party’s belief in block grants (which always represent reductions) to finance federal aid. These reductions will impact service delivery especially in areas like health and social services which have greater impact on the less fortunate segments of society. That pressure is a major credit negative for state and local tax backed credits.

The Administration and many in the Congressional majority favor a greater private role in the provision of infrastructure. Exactly how does the elimination of private activity bonds achieve that goal? It doesn’t mean that the private sector can no longer participate but by raising the cost of capital it makes projects more expensive for end users while making it harder for private vendors to achieve their desired rates of return on capital. That is true even if those rates of return are reasonable. And if the returns are low will the private sector want the government participant in these projects to assume more of the development risk? If so, that is another source of increased risk to government which will further hinder the development of necessary infrastructure.

Finally, there is the issue of whether the proposed package which by all accounts benefits the wealthiest taxpayers relative to others will indeed achieve the job growth projections which have been cited as the overarching reason to accept the clear weaknesses of this proposal. Unfortunately, history tells us that it will likely not based on the quantitative facts available.

History is instructive as to whether this was indeed the case with the Reagan and Bush tax cuts. In the immediate years after the Reagan tax cuts, average weekly wages for rank-and-file workers (non-supervisors) went from $285 a week in the autumn of 1986 to $282 a week in October 1987, according to Labor Department statistics that are adjusted for inflation. Average weekly wages hit $271 a week by 1990. After the Bush tax cuts, median real wages actually dropped from 2003 to 2007. Household income from business-cycle peak to business-cycle peak declined for the first time since tracking started in 1967. This was followed by the Great Recession. In both cases, the federal deficit exploded which contributes to larger borrowing requirements competing with the financing needs of state and local government and businesses.

Proponents such as the President are trying very hard to show that the plan is a job and income creator. The President cited the concurrent announcement of the tax cut with that of plans for Broadcom, an electronics manufacturer, to “return” its corporate headquarters to the US. He cited revenue forecasts (confusing that with income) to tout the increase to the tax base which would support his plan. In fact, Broadcom already physically has it headquarters in San Jose, CA. It is legally domiciled in Singapore and that legal domicile is what will be returned to the US through incorporation in Delaware. Apparently, this decision was already made before the tax plan was announced and obviously before enactment. The reason for the relocation likely has nothing to do with the US tax plan.

Currently, the government of Singapore give Broadcom tax breaks which facilitated its domicile there.  Recently, it was announced that Singapore would end those tax breaks four years earlier than expected. Broadcom is also pursuing the acquisition of a US company and that transaction is subject to, and threatened to be held up by, a legally required review of the takeover by a foreign based company which derives some 40% of its revenue from China. The “relocation” to the US would stop that review without changing any of the other characteristics of the company.

So what would the net result be for states and municipalities by this plan? Less revenue (unless significant decoupling of state tax schemes from the federal scheme occur), a greater share of costs for many basic services, a higher cost of borrowing, less flexibility in infrastructure development, less financing flexibility during times of declining rates (which is a reflection of diminishing economic activity), and a reduced ability to maintain existing infrastructure especially in areas like health and the environment.

All in all a stunningly comprehensive attack on the funding of basic government responsibilities likely to contribute to a less functional and more slowly expanding economy.

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INDIANA TOLL ROAD STUDY

According to a feasibility study awaiting review by Gov. Eric Holcomb, there is an 85 percent chance that revenues would exceed $39 billion from 2021 to 2050 by converting six Indiana interstates into toll roads. The estimates were prepared by HDR Inc. for the Indiana Department of Transportation, which was assigned to do the feasibility study by the Indiana General Assembly this past session. HDR was to examine the feasibility of tolling six Indiana interstates.

The revenue predictions do not account for the costs of toll collections or insurance. However, INDOT would be encouraged to explore the use of electronic tolling so drivers would not need to stop or slow down. The state would need to build about 370 devices that house cameras to capture transponders and license plates, costing about $1 million. The analysis was based on an INDOT economic model assuming that passenger vehicles would pay 4 cents per mile; light/medium trucks would pay 6 cents per mile and heavy trucks 19 cents a mile.

Among other claims in the study – “Tolling paired with widening I-65 and I-70 and a decrease in fuel taxes over time could increase Indiana’s Gross State Product by almost $27 billion.” While I-65 would become the largest revenue generator — up to $16.2 billion — it could also see a 10 percent decrease in traffic along its 261-mile northwest-to-southeast route due to tolls. In the case of I-65, the $16.2 billion figure comes with 50 percent confidence level.  A tolling system along I-69 could raise between $8.4 billion (85 percent chance) to $11 billion (50 percent chance). Under the same levels, tolls along the east-west I-70 could likewise produce $6.9 billion to $9.1 billion. Similarly, I-74 could bring in $3.2 billion to $4.2 billion.

The state would need to build about 370 devices that house cameras to capture transponders and license plates, costing about $1 million. The analysis was based on an INDOT economic model assuming that passenger vehicles would pay 4 cents per mile; light/medium trucks would pay 6 cents per mile and heavy trucks 19 cents a mile. “This is a feasibility study, designed to inform discussions about the feasibility of a statewide tolling program. This study is not an investment-grade study that can be used to secure financing for a tolling project,” the study said.

CHICAGO BOARD OF ED OUTLOOK BENEFITS

The troubled Chicago Board of Education credit received positive news in the form of an outlook revision to stable from negative from Standard and Poor’s. The Board’s general obligation bonds remain rated B. The outlook revision reflects the district’s higher state aid revenue as a result of the state’s new funding formula, and lower pension costs, with the state now picking up more of the employer pension contribution, and the district’s ability to extend a higher property tax levy to support the pension contribution. These were a result of the FY 2018 state budget accord.

In July 2017, bond proceeds were used to reimburse the district for swap termination payments and capital expenses, and to pay for near-term debt service expenses, which improved the district’s cash position. The credit still exhibits extremely weak liquidity and its vulnerability to unexpected variances in its cash flow forecast. The district has shown an ability to weather unexpected obstacles such as the increased delays in block grants from the state in fiscal 2017, and City of Chicago officials have indicated a willingness to provide the district with limited financial help if needed. But the district’s cash flow was worse than budgeted in fiscal 2017, and the potential for the state’s own financial problems to negatively affect the district remains an issue.

MOVEMENT ON CHIP RENEWAL

The House approved the CHAMPIONING HEALTHY KIDS Act of 2017 (H.R. 3922), legislation that includes a five-year extension of funding for the Children’s Health Insurance Program and two years of relief from Medicaid disproportionate share hospital payment cuts. Among the CHIP provisions, the legislation specifies that funding for the federal matching rate would remain at 23% through fiscal year 2019, change to 11.5% for FY 2020 and return to a traditional CHIP matching rate for FYs 2021 and 2022. In addition, the bill would eliminate $2 billion in scheduled Medicaid DSH reductions in FY 2018 and $3 billion in reductions in FY 2019.

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.