Joseph Krist

Publisher

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ISSUE OF THE WEEK

THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE

CITY OF MARYLAND HEIGHTS, MISSOURI

$50,250,000

Revenue Bonds

$5,400,000*

Subordinate Revenue Bonds

(Saint Louis Community Ice Center Project)

Ice skating facilities have a relatively poor credit history in the municipal bond market. Regardless of the involvement of a variety of public and private entities, many bond financed facilities have failed to reach projected levels of demand. This has produced a number of defaults which have troubled municipalities and challenged them to provide financing through either initial funding agreements or restructurings.

In spite of this checkered history for these projects, the City of Maryland Heights, MO is undertaking the financing of a new ice facility in the City through the issuance of bonds. The non-rated bonds are intended to be repaid from operating revenues and a pledge of sales tax dollars generated by economic activity in a Community Improvement District.

A variety of private interests are supporting the project including a hotel casino located within the boundaries of the community improvement district as well as the St. Louis Blues NHL hockey franchise. The Blues are a popular team which has enjoyed strong fan support and the community is considered to be a major source of junior hockey participation and interest. a number of current NHL players were initially developed through local St. Louis youth hockey programs.

This proposed deal will be secured by proceeds of a 1% sales tax collected within the District beginning January 1, 2019. Risks to the transaction include construction risk in addition to operating risk and dependence upon economically sensitive sales tax revenues. A mortgage on the facility will be offered to secure the debt.

Nonetheless, many unsuccessful facilities have offered similar profiles – the support of a local professional team and strong interest in youth hockey. This deal does attempt to address many of these historic hurdles to successful ice projects. It will employ a professional manager which does e have experience in the local market, sponsorship agreements providing revenues, and provisions for events unrelated to hockey including concerts.

In any event, the bonds are planned to be sold only to “qualified investors” but that does not prevent them from being placed into high yield bond funds which means that individuals will wind up having these bonds securing their investments. Caveat emptor!

 

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VIRGIN ISLANDS

The US Virgin Islands will move forward with the reopening of the former Hess/HOVENSA owned oil refinery now that the Legislature has approved an agreement last week with ArcLight Capital Partners’ Limetree Bay to operate the facility. The refinery had historically been an important revenue source for the USVI government as well as the source of some 1200 jobs on the island of St. Croix. In the wake of Hurricane Maria, a way to recreate many of those jobs was an important part of the post-Maria recovery plan.

The plan as approved by the Legislature was not all that had been hoped for by the Governor of the USVI. He had wanted revenue received by the government from the project to be dedicated to the USVI’s significantly underfunded public employee pension plan. The pension plan in the 2017 fiscal year had about $4.7 billion less than it needs to cover all the benefits that have been promised, according to the Government Employees’ Retirement System, and is projected to run out of money as soon as 2023. The Legislature did not include the revenue dedication in its approval.

The appropriation of the funds will be determined through negotiations between the Governor and the Legislature. ArcLight Capital will make a $70 million payment to the Virgin Islands government upon finalization and implementation of the agreement. It will continue to make annual payments ranging from $14 million to $70 million, based on the performance of the refinery.

The deal is positive for the USVI credit in that it will provide increased revenue as well as replacement of an estimated 700 of the jobs lost to the economy when the refinery closed.

AURORA ADVOCATE HEALTH SYSTEM

Whenever two health systems merge, there is always ratings risk associated with the endeavor. In April, Aurora Health merged with Advocate Health to create a new substantial regional health provider serving portions of Illinois and Wisconsin. AAH now provides a continuum of care through its 25 acute care hospitals, an integrated children’s hospital and a psychiatric hospital, which in total have 6,563 licensed beds, primary and specialty physician services, outpatient centers, physician office buildings, pharmacies, behavioral health care, rehabilitation, home health and hospice care in northern and central Illinois, eastern Wisconsin and the upper peninsula of Michigan.

The merger impacted the ratings of the outstanding debt of both entities. For those who own debt from Advocate, the impact was negative. Debt formerly rated Aa2 will now be rated Aa3. Debt from Aurora was upgraded from A2 to Aa3. The rating incorporates challenges including integration risk, especially as it relates to realignment of management and governance, fierce competition in rapidly consolidating markets and noted revenue slowdowns attributable to pricing pressure and unfavorable payer mix shifts, particularly in the Illinois region.

The rating also is based on the size and scale Advocate Aurora will have as a market leader over a large geographic service area, potential to capitalize on synergies related to core infrastructure, purchasing and materials management, a strong liquidity position as measured against expenses and financial leverage, both legacy organization’s demonstrated history of successful operations and absorption of growth, and anticipated savings that will be achieved from the debt refinancing.

Security will be a general, unsecured obligation of the obligated group. There is no additional indebtedness tests. The members of the obligated group under the Master Indenture will be: Advocate Aurora Health, Inc., Advocate Health Care Network,  North Side Health Network, Advocate Condell Medical Center, Aurora Health Care, Inc., Aurora Health Care Metro, Inc., Aurora Health Care Southern Lakes, Inc., Aurora Health Care Central, Inc. d/b/a Aurora Sheboygan Memorial Medical Center, Aurora Medical Center of Washington County, Inc., Aurora Health Care North, Inc. d/b/a Aurora Medical Center Manitowoc County, Aurora Medical Center of Oshkosh, Inc., Aurora Medical Group, Inc., Aurora Medical Center Grafton LLC.

LOW INCOME TOLL RELIEF IN VIRGINIA

The area around the cities of Norfolk and Portsmouth are best known as the locations for major US Navy facilities. While these facilities provide a significant economic base, not all of the region’s residents benefit. The two cities have poverty rates that hover around 20 percent, above the national rate and well above the average in Virginia. Nearly half of the residents in both cities spend at least 30 percent of their income on housing costs. So an agreement to have a private operator run two tunnels between the two cities – an agreement that allows the private operator to levy tolls for use of the tunnels has been viewed as an economic hardship for some who travel  between the two cities.

Some 115,000 cars that cross the river between the two cities each day through the either the Downtown or Midtown tunnel. Tolls were put into place in early 2014 under an agreement between Elizabeth River Crossings and the Virginia Department of Transportation that also involves repairs and additions to the tunnels. Each car that passes through either tunnel pays at least $1.73 – up to $5.53 during peak hours without E-Z Pass – each way.

A recent study found that tolls accounted for a 13% decline in annual traffic volume through the two tunnels between 2013, the last year before the tolls were implemented, and 2016. It estimates that the tolls deterred $8.8 million of taxable sales from Portsmouth in 2017, which amounts to nearly $500,000 in lost tax revenue for the city.

Recently, former Governor Terry McAuliffe  brokered an agreement between state government and Elizabeth River Crossings, the private company that manages the tunnels. Through the Virginia Toll Relief Program developed by the Virginia Department of Transportation, Elizabeth River Crossings pledged $5 million in toll rebates to low-income individuals over a span of 10 years.

Eligible individuals must reside in Norfolk or Portsmouth, earn no more than $30,000 each year and cross through the Elizabeth River tunnels at least eight times per month. Using an EZ Pass, a 75-cent credit per trip – between a 13.6 and 43.4 percent discount that adds up to about $30 per month – is refunded to the accounts of enrolled participants after each eighth trip.

2,100 people enrolled in the program in its inaugural year. That increased to just over 3,000 in year two, with two-thirds of enrollees residing in Portsmouth and one-third in Norfolk. For P3 projects to gain acceptance where they involve formerly free facilities, innovative programs to address the concerns of less well off users will likely grow in importance. They are emerging at the same time that discount programs for low income users of public transport systems are growing in major municipalities across the country.

CHICAGOLAND RATING UPGRADE

S&P Global Ratings raised its rating to ‘B+’ from ‘B’ on the Chicago Board of Education’s outstanding unlimited-tax general obligation (GO) bonds. The outlook is stable. S&P cited “the board adopting a balanced budget for fiscal 2019 when accounting for management’s articulated plan to close a small $59 million initial gap and the state adopting a fiscal 2019 budget that includes the promised higher state aid revenue as a result of Illinois’ new evidence-based funding formula (EBF), along with estimates for fiscal 2018 indicating an operating surplus and a resulting positive fund balance.”

Other positive factors include Continued evidence that the board has improved its cash and fund balance position (by an estimated $575 million), reduced reliance on lines of credit (by $455 million), and  notable wins for the board in 2017 from the state now picking up more of the employer pension contribution and the board’s authority to extend a higher property tax levy to support that contribution.

The outlook was raised to positive in April of this year. At that time, S&P said the rating could be raised by one notch after further evidence of increased state funding for fiscal 2018, fiscal 2018 estimates showing a surplus result and a positive fund balance, the board adopting a balanced fiscal 2019 budget, the state adopting a fiscal 2019 budget that included full EBF funding, and the cash flow continuing to show improvement in line with or better than projections—all of which have occurred.  a higher rating is precluded at this time given increased operational costs (over 9% increase from fiscal 2018 projections, a 5% increase from the fiscal 2018 amended budget) spending and the affordability of capital spending in fiscal 2019 and beyond, special education spending pressures, and unresolved sexual harassment scandals and lawsuits.

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

$850,000,000

New York City Transitional Finance Authority (TFA)

Future Tax Secured Subordinate Bonds

Fiscal 2019 Series A

Moody’s: Aa1

New York City comes back to the market in size with subordinated future tax secured debt. The issue carries a high rating despite its subordinate status. High debt service coverage is provided by the pledge of City of New York personal income tax and sales tax revenues, a strong legal structure that insulates TFA from potential city fiscal stress, the open subordinate lien that permits future leverage of the pledged revenues, and New York State’s ability to repeal the statutes imposing the pledged revenues. We do not expect that the State will ever choose to do the latter.

The state legislature established TFA as a separate and distinct legal entity from the city. Further, the state did not grant TFA itself the right to file for bankruptcy. The city has covenanted not to exercise its bankruptcy rights related to personal income taxes if debt service coverage would fall below 1.5 times MADS on outstanding bonds. TFA’s original statutory authorization of $7.5 billion has been increased several times to $13.5 billion (plus $2.5 billion “Recovery Bonds”) for senior and subordinate lien bonds. In 2009, legislation was enacted that allows TFA to exceed the $13.5 billion cap but counts debt over that amount, along with city general obligation debt, against the city’s overall debt limit.

Mechanics of the security are strong. The pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA’s operational costs (with the collection quarters beginning each August, November, February and May). Half of each quarterly set-aside is made beginning on the first day of the first month of each collection quarter and the second half is made beginning on the first day of the second month of each collection quarter. If sufficient amounts for debt service are not on deposit after those two months, the trustee continues to set aside funds in the third month, on a daily basis, until the deficiency is cured.

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NEW JERSEY SPORTS BETTING REVENUE

Sports betting is underway at four locations in the state with commencement on June 14. The New Jersey Division of Gaming Enforcement has released tax data for the first month of operations. Sports Wagering commenced at Monmouth Park and Borgata on June 14, 2018 and Ocean Resort on June 28, 2018. Hard Rock and Ocean Resort commenced limited soft play on June 25, 2018 and opened to the public on June 27, 2018. Hard Rock commenced Internet gaming operations on June 28, 2018.

Sports Wagering Gross Revenue, which commenced June 14th, was $3.5 million for the month. For the month of June 2018, the Racetrack Economic Development Tax of 1.25% of racetrack sports wagering gross revenue was $28,490.

A recent Pew study purports to show that taxes like this are not a magic bullet for state finances. While lawmakers are enticed by taxes on gambling, revenue growth from newly legalized casinos and “racinos” (casino-racetrack hybrids) tends to be short-lived. Competition is a significant contributing factor, suggesting that as more states legalize these activities, states already collecting gaming revenue could see further erosion in these tax streams.

Pew notes that “for all the attention they garner, sin taxes typically represent a small portion of state revenue. In 2015, they made up just over 2 percent of total state revenue. That year, sin taxes accounted for 12 percent of Nevada’s revenue, the highest share in the nation. In North Dakota, however, they made up less than 1 percent. In real dollars, alcohol and tobacco raised $25 billion in state tax revenue nationwide in 2016. Gambling accounts for roughly the same amount: In 2015, the most recent year for which data are available, lotteries, casinos, and racinos generated almost $28 billion for states.”

DETROIT’S PROBLEMS HAVE NOT MAGICALLY DISAPPREARED

The recent announcement that a proposed bond-financed regional transit plan for the Greater Detroit metropolitan area was not approved for the November ballot brings into focus the regional divide which has and continues to plague the City of Detroit as it continues its process of recovery from bankruptcy in 2014. Recent announcements of an end to state oversight and news about redevelopment efforts in the City have encouraged thought among some that the City’s travails are over. The reality is that while the City is out of bankruptcy, it still faces significant obstacles to restore its place as the thriving center of this significant metropolitan area.

The plan needed to have a unanimous “yes” vote Thursday in the Funding Allocation Committee, but Oakland and Macomb counties voted it down. It was called “Connect Southeast Michigan,” and it called for a 1.5 mill property tax levy on Wayne, Washtenaw, Oakland and Macomb counties.

The millage was projected to raise $5.4 billion over 20 years to fund expanded regional transit service and plan forward flexible transit innovations as technology changes the transportation and mobility industries. The average house in the RTA region is worth $157,504, meaning it would cost $118 a year, or less than $10 per month.

Connect Southeast Michigan would also leverage an additional $1.3 billion in farebox, state and federal revenues for Southeast Michigan. Opposition was framed as being based in a perception that non-Detroit residents would have been subsidizing Detroit residents. We suspect that there is more to it than just tax policies. We suspect that the old race based issues which stimulated flight out of Detroit to near suburbs like Oakland and Macomb continue to rear their heads.

This type of thinking has stymied the development of regional solutions to many of metropolitan Detroit’s problems over the last half century.

WHILE MICHIGAN COUNTIES GET A NEW FINANCING TOOL

Moody’s Investors Service has assigned an initial Aa3 rating to a newly established enhancement program, the Michigan Counties Distributable State Aid Intercept Program. This program covers bonds that are secured by a county’s receipt of state aid, a pledge that also carries a statutory lien and interest in a statutory trust established for the benefit of bondholders. Further, the state treasurer is party to an agreement by which a county’s appropriated state aid will be paid directly to a bond trustee. Debt service payments will then be set aside by the trustee before state aid is made available for general county operating purposes.

The Michigan Counties Distributable State Aid Intercept Program reflects a programmatic rating established by Moody’s to assess bonds issued and secured by a county’s allocation of state shared taxes. Pursuant to Act 34, Public Act of Michigan, 2001, counties may issue unvoted debt secured by state revenue sharing payments under the Glenn Steil State Revenue Sharing Act of 1971 (Act 140). The programmatic rating further incorporates the use of statutory authority provided under Act 140 to direct the state treasurer to remit all DSA payments to a trustee to meet set-aside obligations on debt service.

ILLINOIS OUTLOOK UPGRADE CHICAGO ON STABLE STATUS

Moody’s Investors Service has revised the outlook on the State of Illinois to stable from negative. The action reflects expectations that, despite continued under-funding of pension liabilities, any credit deterioration in the next two years will not affect the state’s finances, economy, or overall liabilities to an extent sufficient to warrant a lower rating. The current Baa3 rating reflects Moody’s view of substantial credit strengths – sovereign capacity to raise revenue and reduce expenditures, and a broad, diversified tax base – as well as increasing challenges from fixed costs attributable to employee pension and retirement health benefits.

The improvement in the State’s outlook accompanies actions which saw the affirmation of the Baa2 and Baa3 ratings on the city’s senior and second lien sewer revenue bonds, respectively. Concurrently, the outlook has been revised to stable from negative. The ratings apply to $10 million of senior lien water revenue bonds, $1.3 billion of second lien water revenue bonds, $35 million of senior lien sewer revenue bonds and $1.3 billion of second lien sewer revenue bonds. The city’s senior lien water rating is three notches above the GO rating given that the water system’s service area extends well beyond the city’s boundaries. The ratings also consider the nature of the water and sewer systems as enterprises of the city, the City Council’s authority to adjust rates and the expectation that growing revenue needs of the city government and overlapping units of government could limit the capacity, both practical and political, to implement considerable adjustments if needed.

STOCKBRIDGE GA DEANNEXATION

The legal battle to prevent the de-annexation of land from the City of Stockbridge, GA completed its first round in Henry County Superior Court. A judge ruled that two bills signed by Gov. Nathan Deal in May – one cutting Stockbridge in half and another allowing for a referendum to create the new city of Eagle’s Landing – did not violate the state’s constitution.

The city can immediately appeal to the Georgia Supreme Court which is where this question would ultimately be decided. The decision, although negative for remaining Stockbridge residents and creditors, was necessary in order to move the issue through the courts. If the move is ultimately judged to be legal, it would be a real negative for all Georgia local credits and would reflect a degree of bad faith by the State which would be taking an action which arguably impairs existing contracts between borrowers and creditors.

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

$10,245,000*

SOUTH CAROLINA JOBS-ECONOMIC DEVELOPMENT AUTHORITY

Solid Waste Disposal Revenue Bonds

(Ridgeland Pellet Company, LLC Project)

As we move through the interest rate cycle, we are not surprised to see yet another high yield issue for a relatively untested technology project financing being foisted on the municipal bond market. In this case, the project is designed to produce wood pellets for use as heating fuel overseas. The fuel for the pellets is wood waste produced at sawmills.

Some projects in this sector have been economically viable but the experience with these sorts of projects in the municipal bond space have been decidedly negative. Whether it be for use as fuel or for conversion into products such as medium density fiberboard, the municipal market is littered with a trail of failed projects of this type. As is often the case, the security for the debt is the project itself. The corporate entity operating the plant was newly established in January of this year so there are no other substantial assets behind the project.

The investors once again are being asked to assume all of the construction and operating and financial risk of the project. It has been my experience that these deals are financed in the municipal market after the traditional taxable financing sources have passed on the opportunity. One always has to wonder why operators who have supposedly executed similar successful projects have taken this financing route. This is especially true when a smaller scale individually owned business shifts its source of financing from its traditional sources to the municipal market.

Whenever it occurs at the later point of an economic cycle when interest rates are trending upward, warning lights should go off. Deals in the municipal high yield space that have these characteristics when refinancing options are limited and the perception of overall economic risk is greater present a situation that should motivate investors to strike as hard a deal as possible to mitigate these concerns. Unfortunately, the supply/demand dynamics of the municipal high yield market often result in a deal more favorable for the project rather than for the investor. Caveat emptor!

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BRIGHTLINE

We continue to watch the rollout of the Brightline high speed rail service in Florida from a number of vantage points. The development of successful service would of course mark an important milestone in the evolution of mass transit in the country. Coming at a time of rapid technological change in the transportation sector, the success of this service on a sustainable basis would put the US in a better position to catch up with much of the industrialized world in terms of its long distance passenger rail service.

What interests us about the Brightline story is its continued insistence that it is a privately financed project even as it continues its intense efforts to obtain tax exempt financing for its construction. Those efforts continue as Brightline seeks to complete its expansion from the east coast of Florida to Orlando. Even as the long term outlook for the sustained financial viability of the project, its sponsors are already moving on to additional frontiers for its ambitions.

Now sponsors are pushing for an expansion of service from Orlando to Tampa and are mentioning the potential for projects in other states such as Texas. What we are to make of this is unclear, as the information on passenger utilization and revenues has yet to show that the existing Miami to Palm Beach service corridor is producing a long term viable framework on which expansion can be supported. Suffice to say that we remain unconvinced as the service remains in the “novelty” phase including a substantial publicity effort and promotional pricing.

ARIZONA

Supporters of The Invest in Education Act announced that they have collected enough signatures to put the question on the ballot in November.  The measure proposes raising the income tax rate from 4.5 percent to 8 percent for people  making at least $250,000 and for families earning at least $500,000. For individuals making $500,000 and joint filers making $1 million, the tax rate would be 9 percent. If passed, the tax is projected to raise $690 million annually for teacher salaries and supplies, as well as restoring full-day kindergarten and reducing class sizes.

In May, Gov. Doug Ducey signed a budget giving teachers a 20 percent pay raise over three years plus more than $300 million in discretionary funds over that period. Ducey’s “20 by 2020 plan” is expected to cost $240 million this fiscal year, increasing to $580 million by 2021. The Governor’s plan is based on a new car registration fee of about $18 per vehicle, which is expected to generate an extra $140 million per year.

The governor has repeatedly said he would not support a tax hike on Arizonans.  A telephone poll conducted three weeks after the teacher strike ended found that 65 percent of voters said they would support the initiative in November.

MEDICAID

The ACA has been given up for dead many times but there continues to be momentum for expansion of Medicaid. The latest example is in conservative Nebraska where an activist group seeking Medicaid expansion in Nebraska, announced  that it had gathered more than 133,000 signatures in support of a ballot initiative to authorize the expansion.  85,000 valid signatures are required to put the proposal on the ballot.

The initiative would extend Medicaid coverage to some 90,000 Nebraska residents, who currently do not qualify for the program but have difficulty purchasing health care on their own through the Affordable Care Act. The state will join Idaho and Utah with a Medicaid expansion initiative on its ballot. The initiative is an effort to get around the steadfast opposition to expansion expressed by the state’s governor.

Mississippi has revamped its request to impose work requirements on its Medicaid beneficiaries, a move to address federal concerns that its original proposal would have left some without insurance. In the overhauled proposal, Mississippi guarantees beneficiaries will receive up to 24 months of coverage if they comply with the proposed work requirements, which include working at least 20 hours per week, volunteering or participating in an alcohol or other drug abuse treatment program. Mississippi submitted its initial request late last year.

CALIFORNIA

California received more tax revenue than expected during the month of June and for the 2017-18 fiscal year, which ended June 30. Total revenues of $19.91 billion for June were greater than anticipated in the budget signed in June 2017 by $2.30 billion or 13.1 percent. All of the “big three” revenue sources came in higher than projected. Overall revenues for FY 2017-18 of $135.29 billion were $1.53 billion more than estimates in the May budget revision and $6.82 billion higher than expected in the 2017-18 Budget Act. Total fiscal year revenues were $13.38 billion higher than in FY 2016-17.

For June, personal income tax (PIT) receipts of $12.57 billion were $691.8 million, or 5.8 percent, higher than estimated in the budget proposal released in May. For the fiscal year, PIT receipts of $93.48 billion were $4.34 billion, or 4.9 percent, more than projected in the 2017-18 Budget Act. June corporation taxes of $3.23 billion were $577.2 million, or 21.7 percent, above assumptions in the governor’s May budget proposal. For the fiscal year, total corporation tax receipts were 14.8 percent above assumptions in the enacted budget. Sales tax receipts of $3.15 billion for June were $759.0 million, or 31.8 percent, more than anticipated in the governor’s FY 2018-19 amended budget proposal. For the fiscal year, sales tax receipts were 2.0 percent higher than expectations in the 2017-18 Budget Act.

At the conclusion of FY 2017-18, the state’s General Fund had $10.38 billion more in receipts than disbursements, and $4.84 billion were used to repay outstanding loans from the previous fiscal year. At the end of June, there were $39.93 billion available for internal borrowing from the state’s own funds, which was more than anticipated in the May budget proposal by $1.81 billion.

PUERTO RICO

The government of Puerto Rico sued Puerto Rico’s Financial Oversight and Management Board for attempting to “usurp” the island government’s powers and right to home-rule. The suit is the government’s response to the fiscal board’s rejection of an $8.7 billion budget passed by the legislature, contending it was not compliant with the commonwealth fiscal plan the panel certified. The board proceeded to impose its own budget, which cuts funds for municipalities and workers’ year-end pay, known as the Christmas bonus.

The suit outlines the Government’s position. “The Oversight Board cannot compel the Governor to comply with its policy recommendations, whether those recommendations are free-standing or advanced in a fiscal plan. And the Board certainly cannot force those recommendations on the Commonwealth via a budget. Specifically, the Oversight Board cannot do what it is attempting to do: impose mandatory workforce reductions, change the roles and responsibilities of certain government officials, criminalize certain acts under Puerto Rico law and otherwise seek to micromanage Puerto Rico’s government.”

The suit seeks a ruling declaring that the “substantive policy mandates” in the board’s budget exceed the oversight panel’s “powers and are null and void,” as well as a ruling “enjoining the Oversight Board from implementing and enforcing the Oversight Board’s rejected policy recommendations.” As is nearly always the case, Puerto Rico seeks special treatment. For example, the District of Columbia Financial Responsibility and Management Assistance Act of 1995, which granted the District of Columbia’s Financial Control Board the power to nullify legislative acts and “compel the mayor and city council to adopt its policy recommendations”.

The suit accuses the PROMESA board of attempting to micromanage Puerto Rico’s fiscal affairs. In our view, micromanagement is what Puerto Rico needs. We have asked in a variety of forums why Puerto Rico’s American citizens should be exempt from such supervision when numerous mainland jurisdictions have operated under it. It is a question which never receives an answer. This makes it hard to support the Puerto Rico government’s position as it seeks to regain market access and has multi-billions of defaulted debt outstanding.

FITCH RATINGS ON HOSPITALS

A request from the Lexington County Health Services District, Inc., SC (the district) on behalf of Lexington Medical Center (LMC) to Fitch to withdraw its non-investment grade rating has served to highlight changes to Fitch’s rating criteria for hospital credits. Under the revised criteria, Fitch includes operating leases and net pension liabilities as debt equivalents when assessing a hospital’s leverage profile.

The District’s debt had been rated A+ by Fitch as recently as November, 2017. The application of the new criteria resulted in a new rating of BB+. LMC’s management did not participate in the rating process for this review. The below investment grade rating was applied despite “strong medical and surgical volume growth as a result of successful expansion strategies with a highly integrated physician platform and ambulatory network and further bolstered by population growth in the county.” Fitch also notes that the district returned to strong double digit operating EBITDA margins on an unaudited basis in 2017 and currently in unaudited 2018.

Fitch applied a 20 year period to achieve full pension funding. This is shorter than the 30 year period used by many municipal issuers. Complicating the hospitals position is its status as a governmental entity which participates in state managed pension plans. The District is therefore limited in its ability to alter its pension position outside of actions to spend more currently on pension contributions.

As a result of all of this, the District has asked for the rating to be withdrawn. We see the basis for Fitch’s actions and do not argue that the A+ rating was no longer warranted under the terms of Fitch’s methodology. Whether or not, an enterprise which is projected to produce operating EBITDA margins of approximately 5% to 5.5% in the coming years net of pension contributions is deserving of a speculative grade rating is another issue.

We are not surprised at the request to withdraw the rating. We do not see this sort of pension funding assumption applied to many other credit sectors, so it is understandable that this issuer would exercise such a request. A six notch downgrade does seem to be excessive.

TRUCKERS SUE AGAINST TOLLS IN RHODE ISLAND

In June of this year, the State of Rhode Island began charging tolls on trucks using the major highway in the State. Under the plan, which was signed into law back in 2016, 18-wheelers will pay up to $20 to cross the state traveling on Interstate 95. A single truck will be capped at paying $40 a day.

The tolls are intended to finance a 10-year plan to repair deteriorating bridges in the Ocean State; Rhode Island has the highest percentage of structurally deficient bridges in the country. The tolls, to be collected electronically via 14 gantries, are expected to bring in around $45 million a year once they are up and running.

The scheme seeks to impose costs on those vehicles which contribute to the most wear and tear on roads as well as to address congestion issues. The American Trucking Association and three companies  said the toll system launched last month discriminates against out-of-state trucking companies, violating the commerce clause of the  U.S. Constitution.

It asks a judge to stop the tolls, now operating at two locations on Route 95 in Washington County, and eventually slated to include 14 tolls throughout the state. The two Route 95 tolls charge $3.25 and $3.50 respectively, so 133,000 transactions would result in somewhere in the neighborhood of $450,000 in charges since the system has been running.

The toll program is but one step in efforts at the state level to develop usage based schemes for road users in the face of inaction at the federal level to finance infrastructure. It would seem to be the type of effort supported by the Trump Administration as it seeks to move the finance of infrastructure to a fee based model and to increase the role of the private sector in infrastructure development and execution.

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

________________________________________________________________

SANTEE COOPER SEEKS DIRECT REVIEW

South Carolina Public Service Authority (Santee Cooper) has requested a direct review by the South Carolina Supreme Court of a lawsuit filed by 20 electric co-ops representing almost 2 million customers to prevent Santee Cooper from charging them for the costs of the failed nuclear generating expansion. The co-ops want the courts to order Santee Cooper to stop charging them for the unfinished reactors, which Santee Cooper and its partner, SCANA, abandoned last summer after a decade of work and $9 billion in costs. The co-ops filed suit in August to stop the billing and seek refunds.

Santee Cooper argues that the utility has the legal right to charge its customers for debts it incurred to build the reactors even after the project was cancelled, leaving billions in unpaid debt. The chairman of the board of Central Electric Power Cooperative, which buys power for the state’s coops from Santee Cooper, said, “Let’s be clear: electric cooperative consumer-members should not have to pay billions of dollars for two nuclear units that are not producing power.”

Central Electric, Santee Cooper’s largest customer, buys about 60 percent of the power that utility produces and distributes it to the state’s electric co-ops. The co-ops want a “swift resolution to this matter for our members that protects them from footing the bill for someone else’s mistakes.” Central Electric is Santee Cooper’s largest customer. It buys about 60 percent of the power that utility produces. If the co-ops should prevail, Santee Cooper “eventually would be unable to maintain its ongoing operations,”   according to its filing for review.

The Court could take the matter up, hold hearings and, ultimately, issue a ruling on Santee Cooper’s petition. Or the high court could send the issue back to a lower court for hearings, producing a record of the facts and the laws at issue.

HEAD TAX UP FOR VOTE IN NOVEMBER

The Mountain View, CA City Council voted unanimously late Tuesday to place a measure on the November ballot asking residents to authorize taxing businesses between $9 and $149 per employee, depending on their size. If the measure passes, the tax could generate upwards of $6 million a year for the city, with $3.3 million coming from Google alone. The bulk of money raised through the head tax would pay for transit projects, including bicycle and pedestrian enhancements, and 10 percent would go toward providing affordable housing and homeless services.

The effort comes in the wake of the City of Seattle’s recent effort to enact such a tax only to repeal it before it was collected in the face of heavy political pressure lead by Amazon. While the tax in Mountain View would be imposed on a variety of employers, the real target is Google. Unlike Seattle’s proposal, which was primarily meant to ease homelessness, this one would benefit not only his city’s residents but also Google’s employees, who face the same transportation and housing challenges.

Efforts of the City’s business community seem to reflect a belief that the ballot measure would succeed. The city’s Chamber of Commerce, opposed the decision, but says it now hopes to persuade a majority of council members to lower the proposed maximum tax rates before settling on the ballot’s language. The Chamber has originally proposed an alternate tax model that asks businesses with more than 1,000 workers to pay a flat $100 per employee rate.

The model the council ultimately approved would charge the city’s roughly 3,700 businesses a progressive flat rate based on their size and a progressive per employee rate. Businesses with up to 50 employees would be charged a base rate of up to $75 per year and those with more would be charged a base rate plus a per-employee fee that climbs with the work force’s size, up to a maximum of $150 each at Google, which employs a little more than 23,000.

Mountain View’s current business tax has been in place since 1954 and is based on businesses’ square footage. Head taxes are in place in other Silicon Valley communities including San Jose, Sunnyvale and Redwood City.  Cupertino is expected to propose one in 2019. The tax, to be phased in over two years starting in 2020, requires the approval of a simple majority of voters.

GREEN MOUNTAIN BUDGET BATTLE

Vermont Gov. Phil Scott announced that he will allow the legislature’s latest budget plan to become law, a decision that will prevent a July 1 government shutdown. “I’m left with no choice but to allow [the budget] to become law without my signature,” Scott said.

The budget is essentially the same as the one Scott vetoed June 14. The House passed the proposal after allegations of a procedural error. The votes came after a compromise deal that would have ended the impasse fell apart Friday.  The governor has insisted since he took office in 2017 that the state budget should not increase taxes or fees for Vermonters.

The Legislature passed three versions of the state budget which would not prevent an increase in the nonresidential property tax rate, which is is set annually under state law. Scott vetoed the first two but will not veto the latest proposal.

The lawmakers’ goal was to fund shortfalls in the state’s teacher retirement fund. The Governor hoped to do that while preventing a tax increase on nonresidential property tax payers, which includes renters, small business owners, and camp owners. The impasse was all the more frustrating as an adopted budget does not have to be balanced – Vermont remains the only state where that is the case. It would however, have forced the government to shut down if a budget had not been enacted.

KENTUCKY MEDICAID WORK RULES ENJOINED BY FEDERAL COURT

The U.S. District Court for the District of Columbia vacated the Trump administration’s approval of Kentucky’s plan and sent it back to HHS. The Court said that the Trump administration’s approval was “arbitrary and capricious” because HHS did not address how the Kentucky waiver would further the underlying purpose of Medicaid. “The record shows that 95,000 people would lose Medicaid coverage, and yet the [HHS] Secretary paid no attention to that deprivation.”

Gov. Matt Bevin has threatened to cancel the entire Medicaid expansion, which covers more than 400,000 low-income adults in his state, if courts blocked the work requirement or other changes he sought. Kentucky had the biggest improvement in its rate of uninsured residents of any state which expanded Medicaid under the ACA.

The decision continues a streak of losses for the fiscally conservative Governor. Teacher protests earlier in the year led to changes in education funding which he opposed and pension changes championed by the Governor and approved by the Legislature were recently found to be legally deficient in the courts. Now, the plan to restrict Medicaid has failed judicial review.

Effectively, the current credit outlook for Kentucky remains guarded at best as pension continue to weigh on the Commonwealth’s credit and hold down its ratings.

NEW JERSEY AVERTS A BUDGET SHUTDOWN

Gov. Philip Murphy of New Jersey and Democratic legislative leaders reached an agreement on a fiscal 2019 budget to keep the government open and avoid a state shutdown for the second time in two years. The budget agreement increases the income tax to 10.75 %from 8.97 % on those making more than $5 million a year.

The budget includes an annual surcharge of 2 % on companies that earn over $1 million annually that will be in place for four years. Mr. Murphy’s plan to raise the sales tax to 7 % from 6.625 % was not included in the final deal. That outcome reflects the compromises which had to be made by both sides. The Governor gave up a sales tax increase and the legislature allowed the income tax to be raised.

The $37.4 billion budget includes financing for nearly all of the Governor’s proposed investments, including a $242 million increase in funding for New Jersey Transit, an additional $83 million for prekindergarten, an extra $25 million for community colleges and a $3.2 billion payment into the state’s underfunded pension system.

The pension payment is a positive reversing a trend of annual underfunding even after an agreement was reached in the Christie Administration to increase annual payments by the State. The state prevailed in litigation brought by the state’s employees after the Legislature failed to meet the annual appropriation levels agreed to.  New Jersey is an outlier this year as the last state in the country that hadn’t reached some sort of a budget agreement by the fiscal deadline, according to the National Conference of State Legislatures.

PROPERTY VALUES IN CHICAGOLAND

The problems of the City of Chicago in terms of its finances are pretty well known. It is through the prism of these problems that other economic and demographic trends are viewed. For the first time in some years, there may some positive trends emerging in terms of the regional tax base which supports outstanding tax backed debt from issuers in the region.

The full market value of real estate in Cook County was approximately $559.7 billion in tax assessment year 2016 according to an annual estimate released by the Civic Federation. The 2016 total value estimate represents an increase of $30.8 billion, or 5.8%, from the 2015 estimated full value. Tax year 2016 is the most recent year for which data are available. The 2016 estimates represent the fourth year that real estate values in Cook County increased following six straight years of decline in value.

In addition to Cook County as a whole, the report estimates the full market value of real estate in the City of Chicago, northwest Cook County suburbs and southwest Cook County suburbs. The estimated full market value of real estate in the City of Chicago increased by 5.4% in tax assessment year 2016 while the northwest and southwest suburbs experienced increases of 6.4% and 6.0%, respectively.

While the estimated full value of real estate has increased since 2012, the 2016 full value of real estate was still $96.8 billion lower than it was ten years prior in 2007. Between 2007 and 2016 the estimated full value of all classes of property in Cook County as a whole declined by 14.7%. As shown in the chart below, estimated full value decreased from $656.5 billion in 2007 to a low of $414.4 billion in 2012, a decline of 36.9%, then rose to $559.7 billion in 2016.

So in spite of declines in population, the value of property continues to increase. That is the result of a lot of things (the strength of the real estate market is apparent in many regions) but we suspect that the willingness and ability of new residents to afford the higher real estate values is offsetting to some extent the declines in population that may be driven by gentrification and the move out of Chicago by lower income residents in response to higher living costs and a skills gap that keeps those residents from the better paying jobs.

ENJOY YOUR FOURTH OF JULY

Like many of you, the MCN is taking some time off this week as we celebrate the nation’s birth. It will return on July 16. Enjoy the Fourth safely!!

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