Joseph Krist

Publisher

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ISSUE OF THE WEEK

$340,935,000

ILLINOIS FINANCE AUTHORITY

REVENUE REFUNDING BONDS

(OSF HEALTHCARE SYSTEM)

Moody’s: A2   S&P: A

This credit comes to market with a negative credit outlook. Moody’s is concerned that OSF would not be able to achieve and sustain stronger margins that would be sufficient to offset high leverage for the rating category. Moody’s believes ongoing capital investments would likely impede deleveraging over the coming years.

OSF Healthcare System operates thirteen acute care hospitals and a large multi-specialty physician group. Twelve of the system’s hospitals are located in Illinois; OSF also owns a small critical access hospital in the Upper Peninsula of Michigan. The System’s largest hospital, OSF Saint Francis Medical Center in Peoria, Illinois, is a 629-licensed bed tertiary care teaching hospital. OSF’s newest hospitals, a 174 bed facility in Danville and a 210 bed facility in Urbana, were acquired from Presence Health in February 2018.

The acquisition of the Presence Health facilities is a bit of a double edged sword. The acquisition will add some scale and potential upside opportunity, but will also hinder deleveraging and expose OSF to a market dominated by the Carle Foundation. The system is expected to maintain overall good volume trends, and a solid, albeit more moderate level of investments.  Some of the risk is offset by  its leading market positions in several markets including its key Peoria market.

The issue will refund long term debt issued in 2007 and 2009 and will bond out shorter term debt issued to initially fund the acquisition of the Presence facilities.

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ANOTHER MAJOR HEALTHCARE COMBINATION

Henry Ford Health System and Wayne State University  have signed a letter of intent to affiliate. The potential deal would unite two of the major providers in the greater Detroit metropolitan area. The affiliation would designate Henry Ford Hospital in Detroit as the primary institutional affiliate for Wayne State University’s School of Medicine, College of Nursing and Eugene Applebaum College of Pharmacy and Health Sciences.

The agreement would create the health sciences center to be a separate operating and governance structure with a president, board, budget and governing committees.” It would oversee management and financial coordination of the partnership’s clinical, research and educational programs and activities. The affiliation under discussion is not a merger or acquisition. Both Wayne State and Henry Ford would continue to work with other contracted partners, including DMC.

For Wayne State, the deal offers a way to reduce its relationship with DMC which has become more fraught in recent years. This has been especially true since DMC went under the ownership of Tenet Healthcare Corp. It had become clear that the public and for profit relationship was mutually agreed to be a poor fit. Now there is an opportunity for Wayne to partner with a not for profit academic medical center which is hoped to result in a much lower level of cultural friction between two institutions.

For Henry Ford, the partnership would expand its opportunities for participation in research. The plan would create a $341 million-plus research enterprise that would rank 74th-largest in the nation.

AND AN UPDATE ON ANOTHER

The Massachusetts Health Policy Commission (HPC) has rendered a preliminary opinion as to the potential impact of the proposed merger between Beth Israel Deaconess Medical Center and Lahey Health. After the transaction, BILH’s market share would nearly equal that of Partners HealthCare System, market concentration would increase substantially, and BILH would have significantly enhanced bargaining leverage with commercial payers. BILH’s enhanced bargaining leverage would enable it to substantially increase commercial prices that could increase total health care spending by an estimated $128.4 million to $170.8 million annually for inpatient, outpatient, and adult primary care services. Additional spending impacts would be likely for other services; for example, spending for specialty physician services could increase by an additional $29.8 million to $59.7 million annually if the parties obtain similar price increases for these services. These would be in addition to the price increases the parties would have otherwise received. These figures are likely to be conservative.

The parties could obtain these projected price increases, significantly increasing health care spending, while remaining lower-priced than Partners. Plans to shift care to BILH from other providers and to lower-cost settings within the BILH system would generally be cost-reducing and proposed care delivery programs may also result in savings, but there is no reasonable scenario in which such savings would offset spending increases if BILH obtains the projected price increases.

Achieving all of the parties’ care redirection goals could save approximately $8.7 million to $13.6 million annually at current price levels, or $5.3 million to $9.8 million annually with projected price increases. The scope of care delivery savings is uncertain; however, the parties have estimated that their care delivery plans will save an additional $52 million to $87 million. The parties have stated that BILH would achieve internal savings and new revenue that would allow them to invest in these plans and enable BILH to be financially successful without significant price increases. Nonetheless, to date, the parties have declined to offer any commitments to limit future price increases.

NEW JERSEY BENEFIT AGREEMENT

New Jersey has announced that a deal has been struck between the governor’s office and the state’s public-sector unions representing local, state and county employees; college professors; and school employees. It is estimated that the plan will save nearly half a billion dollars on health care costs over the next two years. Savings will include $274 million in cost reductions for public employees and retirees in the coming health care year, which starts Jan. 1. The state will also save $222 million in the 2020 calendar year by adopting Medicare Advantage for retirees of both the state health benefits program (SHBP) and the school employees health benefit plans plan (SEHBP).

In the 2019 fiscal year, the state expects to save $37 million in the SHBP by adopting a number of formula changes adopted in 2016, which have to do with the use of generic medication and out-of-network reforms. The deal is designed to reflect the provisions of Chapter 78, enacted in 2011 to establish a framework for addressing New Jersey’s unfunded pension position liabilities. Chapter 78 requires public employees and retirees to field a larger share of their health care premiums, which is phased in during a multiyear period and depends on the participant’s income level.

The new health plans are to cover more than 800,000 current and retired state and local government employees — nearly 1 in 10 New Jerseyans. Health care premiums for the state’s teachers are expected to decrease 1% next year, after a 13% increase this year, while prescription co-pays will decrease even more according to the Governor’s office. The savings will be achieved by pushing Medicare-eligible retirees from preferred-provider plans to Medicare Advantage, and by making it more costly for employees and retirees to use out-of-network specialists and brand-name prescriptions. Employees and retirees will have no co-pays for in-network doctors and $3 co-pays for generic prescription drugs. The state is spending $15,680 this year on health care for the average employee and $12,988 for the average retiree, according to figures from the state treasurer’s office. Private-sector employers in New Jersey spend an average of $4,747 per employee for health insurance, according to the Kaiser Family Foundation.

ANOTHER CONVENTION FINANCING

They have a checkered past and, like stadiums, evoke different views of their impact on local economies and finances. So it is interesting to see that Sacramento’s City Council approved spending up to $328 million to renovate the city-owned Sacramento Convention Center and Community Center Theater. The theater has been the subject of litigation over the issue of disabled access.

The mayor says that the city’s investment in the renovations will generate at least $22 million annually back into the city. The construction and the expanded venues will also create 2,800 jobs. There is no real way to evaluate the claim. Likely many of the jobs in that total are construction jobs which are not long term contributors.

The debate is coming at a particular point in the economic and rate cycles. From the City’s standpoint, interest rates remain favorable (if rising) and the economy is at a level where the project looks viable. Whether those conditions remain is a risk for the project. Should the completion of the project coincide with a negative economic turn, the project will have a harder time generating performance metrics consistent with debt service coverage requirements. a

BROADBAND P3 UNDER FIRE IN KENTUCKY

As the discussion continues about the viability and efficiency of public-private partnerships (P3), the news out of Kentucky regarding the commonwealth’s P3 for broadband development in the state’s rural areas is not good.  The program known as KentuckyWired is the subject of an audit by the Commonwealth chief auditor and the results are not good from either a financial or policy point of view.

The auditor’s report includes nine major findings: that the structure of KentuckyWired departs from usual public-private partnerships and the original design of the project; that important terms more favorable to Kentucky and its taxpayers were changed during procurement; that the role of private sector funding has been publicly overstated; that the public was directly misled about revenue streams that would help finance the project; that the project has encountered significant cost overruns; that Kentucky has proceeded with the project despite “unrealistic” contract terms regarding its execution; that KCNA, overseeing the project, has inadequate financial analysis and monitoring of costs; that an $88 million settlement with one of the contractors lacked sufficient analysis; and that Kentucky is relying on speculation about wholesale revenues.

Among the issues cited for criticism – the KentuckyWired project would net the state $1.3 billion in revenue. The auditor report contends that that figure is based on a highly “conceptual” model KCNA failed to verify, profits are subject to sharing with the Center for Rural Development, Inc., and even then, the model is based on constantly increasing wholesale prices that would be passed on to consumers.  The project management  admits to several shortcomings.

The state did indeed rely heavily on the expertise of private partners, including Macquarie Capital. One private vendor has refused to respond to requests for information about its role in producing erroneous maps which caused the vendor to attempt to negotiate easements for properties not in the project’s right of way. This despite the fact that the Commonwealth has a contractual right to audit the project via the Finance and Administration Cabinet, and exercising that contractual right is how the Auditor of Public Accounts came to perform this Special Examination.

The situation highlights many of the issues which P3 opponents raise in their opposition to these arrangements. They include the knowledge gap between municipal entities and private vendors in terms of both project execution and negotiations of terms. The public rightly questions the terms of P3s generally when they see deals such as this one generating the problems it has. The resulting lack of support stymies efforts by the Trump Administration and its congressional supporters to support an increased role for private interests in the provision of public goods.

SEATTLE SPORTS

Washington state’s King County Council has approved $135 million in public funding for improvements at Safeco Field where the Seattle Mariners have played for the last 19 seasons. The team had originally asked for $180 million in funding to fix wear and tear at Safeco in association with a 25-year extension with the Public Facilities District that oversees the ballpark.

The funding comes as the Seattle City Council unanimously approved a $700-million arena renovation project that will take place at the site of the current KeyArena, and if all goes according to plan, the building should be ready for NHL action in October 2020. Opposition came from housing advocates who seek increased public resources to address Seattle’s increasing housing affordability crisis.

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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INDIANA TOLL DEAL APPROVED

The board of the Indiana Finance Authority unanimously approved a new deal Thursday with the vendor operating the Indiana Toll Road, allowing 35% fee increases for large trucks. (The rate increase applies to vehicles with three or more axles.) The rate hike takes effect Oct. 5 and the state would receive $400 million that same day from the Indiana Toll Road Concession Co.

Indiana would receive a total of $1 billion over three years.  The risk of non-payment of the latter two installments is secured by a bank letter of credit. $600 million is projected to facilitate completion of the Interstate 69 extension in southern Indiana; $190 million for projects on U.S. Routes 20, 30 and 31; $100 million to boost rural broadband access; $90 million for improving hiking and biking trails; and $20 million to attract new direct flight routes to the state’s airports.

SUFFOLK COUNTY, NEW YORK

Quite rightly, most of the negative credit attention focused on Long Island has been directed towards Nassau County. The County still operates under the review of a state control board and the County is still coping with fallout from federal corruption trials involving recent County officials. Now it appears that Nassau’s eastern neighbor may be gaining its share of the negative credit glare.

Moody’s Investors Service has downgraded to Baa1 from A3 Suffolk County, New York’s issuer rating and general obligation limited tax (GOLT) rating. The county has $1.6 billion in GOLT debt outstanding. The county’s deteriorated financial position resulting from recurring operating deficits, deferment of pension contributions, and reliance on significant annual cash flow borrowing were cited as the basis for the downgrade.

The county’s negative available fund balance position (GAAP basis) and negative net cash position persist and grew to a negative 12% and 10.9% of revenues. The GOLT bonds are secured by the county’s general obligation pledge as limited by the Property Tax Cap Legislation (Chapter 97 (Part A) of the Laws of the State of New York, 2011). The lease appropriation bonds are secured by the county’s obligation to pay debt service subject to appropriation.

The stable outlook (revised from negative) reflects the expectation that the county will continue to make strides in reducing budget one shots and nonrecurring revenues to achieve structural balance. The outlook also reflects the county’s efforts to improve its financial position by implementing expenditure control measures and utilizing resources provided by the county’s sizeable and diverse tax base.

WASTE TO ENERGY

Investors in the high yield waste to energy space have learned the hard way over the years the importance of the financial strength of the operator can be to the credit integrity of waste to energy project financings. ratings risk comes not just from the operating performance of the project but also from the credit of the operator who often has financial obligations tied up in the operations of the facility.

A recent example is noted at the Solid Waste Authority of Palm Beach County’s (two waste to-energy plants. Earlier this month, Covanta Holding Corporation acquired the Babcock & Wilcox Enterprise, Inc. (B&W) subsidiary Palm Beach Resource Recovery Corporation (PBRRC) which operates the two plants. The change led Moody’s to note that replacing B&W with Covanta is credit positive for the authority because Covanta is a financially stronger entity and will be the guarantor for payment and performance of all of PBRRC’s covenants and obligations under the operations and maintenance agreements.

B&W announced two separate restructurings in 2016 and 2017, and the company has reported seven out of eight past consecutive quarters of net losses and three consecutive quarters of negative adjusted EBITDA through the second quarter of 2018. The company’s second-quarter 2018 GAAP net loss from continuing operations was $209.7 million, its GAAP net loss inclusive of discontinued operations was $265.8 million, and adjusted EBITDA was negative $96.2 million.

In contrast, Covanta’s ratio of cash flow from operations before any changes in working capital (CFO pre-WC) to debt, which was above 7% in each of the past three years (2015-17).

TEN YEARS AFTER (NOT THE BAND)

OK, the title dates me. Nonetheless, we are in the midst of many commemorations and retrospectives regarding the 2008 financial crisis and subsequent Great Recession. Our review takes us back to the mortgage market and the default epidemic which infected many regional real estate markets. Many have argued that the epicenter of the crisis may have been in Nevada, especially the greater Clark County (Las Vegas) market. At one point, one out of three homes was delinquent or in foreclosure. Stories abounded where lenders went to foreclose on properties only to find them vacant with the keys on the kitchen counter.

So it is with interest that at the ten year anniversary, things have changed in that market. The latest sign is the fact that S&P Global Ratings revised its outlook to positive from stable and affirmed its ‘AA’ long-term rating on Nevada’s general obligation (GO) limited-tax bonds outstanding. The basis for the move – “The positive outlook reflects our expectation that Nevada will maintain its proactive budget management as it did during the extreme economic downturn during the Great Recession along with our expectation that the state will continue to build its reserves during the economic expansion to mitigate future revenue volatility.”

With the real estate market in much better shape, S&P expects to see continued increases in the state’s reserves which improved from about 7% in fiscal 2011 to a projected, strong 14% at the end of fiscal 2018. It is noted that the economy remains subject to cyclical forces and that it still rests on the twin pillars of tourism and related gaming and entertainment revenues.

PENSION IMPACT ON LOCAL ILLINOIS RATING

The potential for rising pension costs to wreak havoc with the ratings of individual municipalities in Illinois becomes more apparent over time. The latest victim is Alton, Il. S&P announced last week that lowered its long-term rating to ‘A’ from ‘A+’ on Alton, IL’s existing general obligation (GO) debt. The outlook is negative.

The reasoning behind the move is clear. “The downgrade and negative outlook reflect a view of Alton’s significant pension liabilities stemming from its policemen’s and firefighters’ pension plans and the pressure the liabilities are exerting on the budget. City officials are justifiably concerned about the low funding levels, the affordability of the required contributions, and the city budget’s ability to absorb the costs.

The action comes in spite of the pending sale by the City of its wastewater treatment plant and sewer system to Illinois American Water. From S&P’s standpoint, the sale and the proceeds it will produce while directed towards funding its pension costs will not be enough on its own. Said S&P: “While we recognize the sale presents a measure of budget predictability in the near term, the city will still have a significantly high pension liability and exposure to escalating pension contributions, and we believe it will need to devise a long-term plan to stabilize its policemen’s and firefighters’ pension funds.”

MASS TRANSIT LOW INCOME DISCOUNTS COME TO THE MILE HIGH CITY

The Denver Regional Transit District’s low-income fare program was approved.  It will take effect in early 2019 and provide a 40 % fare discount to households at or below 185 % of the federal poverty level. Denver now joins cities including Seattle and New York in operating similar programs. A deeper-than-existing 70 percent fare discount for riders between the ages of six and 19 was also approved. The low income discounts are added to the existing array of discounts available to Denver residents including discounts which serve seniors ages 65 and up, individuals with disabilities, Medicare recipients, and elementary, middle and high school students ages six to 19. Children five and younger already ride free with a fare-paying adult. Base fares on buses and on the region’s rail transit line to Denver International Airport will rise from $2.60 to $3, and regional bus fares from $4.50 to $5.25. Fares will go up along the region’s A-Line train, driving the cost of a one-way trip between Denver and the airport from $9 to $10.50.

THE MARKET CLAIMS ANOTHER COAL PLANT…

The Navajo Generating Station (NGS) on the Arizona-Utah border will cease operations in a year’s time. A planned sale to two investors was called off. They could not come to terms after failing to find clients who would be interested in buying electricity from the coal fired power.

The announcement comes despite significant efforts by Interior Secretary Zinke to find ways to keep the plant open. Navajo was for many years considered a major source of regional air pollution being blamed for among other things smog in and around the Grand Canyon. Nevertheless, the Interior Secretary strongly supports keeping the plant open. This flies in the face of the market’s clear message regarding the long term relative uneconomic viability of coal generation in the power supply marketplace.

…WHILE NATURE PRESSURES ANOTHER

The water itself might have been enough, if it wasn’t then the hog waste in the water may have been enough. Now another aspect of coal fired generation having deleterious environmental effects is rearing its head in North Carolina. The earthen dam separating Sutton Lake from the Cape Fear River breached near Wilmington, N.C.  Now coal waste threatens to drain into the Cape Fear River.

The breach follows reached the news that water had the dam that separates the lake from the coal ash ponds for the L.V. Sutton Power Station (operated by Duke Energy). Floodwaters had displaced about 180 truckloads of coal ash from a nearby pond.  Coal ash contains heavy metals like arsenic and cadmium, and its disposal is federally regulated.

A prior coal ash spill at a Duke facility in 2014 saw Duke admitting fault and paying more than $100 million in fines and restitution for that incident.

NEGATIVE SENIOR LIVING TRENDS

This year we have seen two studies of overall national occupancy rates at senior living facilities. The National Investment Center for Seniors Housing & Care reports that skilled-nursing facilities had fewer patients in the second quarter than ever before. Occupancy reached a record low of 81.7% in the second quarter of 2018, down from 83.1% in the second quarter of last year.

The Affordable Care Act drives demand downward as it  rewards new care models that facilitate primary and home healthcare. Additionally, the Centers for Medicare and Medicaid (CMS) recently finalized a new payment rule for SNFs that ties payments to the complexity of patients’ clinical needs rather than volume of services provided.

Earlier in the year, a similar survey of assisted living data for the first quarter of 2018 showed a similar experience. Assisted living occupancy reached a record low in the first quarter of 2018, according to data released by the National Investment Center for Seniors Housing & Care.

Occupancy in assisted living hit 85.7% during the quarter, down 0.7 percentage points from the fourth quarter and down 1.3 percentage points from year-earlier levels. Overall, average seniors living occupancy fell to a six-year low of 88.3% in the first quarter, down 0.5 percentage points from the previous quarter and down 0.9 percentage points from year-earlier levels. This rate put senior living occupancy 1.4 percentage points above its cyclical low of 86.9% reached during the first quarter of 2010 and 1.9 percentage points below its most recent high of 90.2% in the fourth quarter of 2014.

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

$253,000,000

City of Minneapolis

Fairview Health System

Health Care System Revenue Bonds

A2/A+

The issue comes to market with its A2 rating intact but with an outlook lowered from stable to negative. The negative outlook reflects the increased financial challenges that the system will need to absorb given the higher level of funding to the University and the losses at HealthEast. The higher funding requirement is part of a Letter of Intent (LOI) between Fairview and the University of Minnesota for a new affiliation agreement.

The LOI, if executed, would further solidify Fairview’s essential and long-standing role as the academic health system for the University of Minnesota and create greater incentives for physicians to increase productivity. Tthe proposed agreement would require increased funding to the University from Fairview, which might thwart margin improvement. Hence the shift to a negative outlook.

At the same time, Fairview’s integration of HealthEast will pressure the new entity’s margins as it seeks to improve its modest financial performance and moderate liquidity. In addition, despite its broad offerings, Fairview will remain highly reliant on its more profitable specialty pharmacy services. Further, the entry of for-profit health plans will raise market uncertainty.

All bonds are secured by an unrestricted receivables pledge from the System’s Obligated Group which includes HealthEast. This deal will allow the system to refinance insured debt with restrictive covenants. The system has obtained credit facilities not subject to the restrictive covenants. Total combined operating revenue in fiscal 2017 was $5.2 billion with over 90,000 admissions. The System owns and operates eleven hospitals, including the University of Minnesota Medical Center, and also operates over 100 primary and specialty care clinics, seven ambulatory care centers, over 40 retail and specialty pharmacies, as well as senior care housing and long term care facilities, hospice and home care, medical transportation and a health plan.

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CHARTER SCHOOLS

The California legislature has enacted legislation which would ban for-profit charter schools within the state. 25,000 students are now enrolled in 34 for-profit charter schools in the state, according to the California Charter Schools Association and an analysis by the California State Assembly. Now a real source of competition for the nonprofit charter school base has been eliminated. This occurs at a time when overall school enrollment trends are negative.

Some 10% of California students are enrolled in charter schools so the overall market for charter schools should remain strong. Enrollment and the number of charter schools continue to increase. During 2000-10, the number of charter schools jumped to 809 from 299, according to the California Charter Schools Association. In recent years, growth trends have slowed as traditional public schools have responded to competition with the introduction of specialized programs and both charter and district schools confront ongoing erosion of their student population, with the state projecting additional declines totaling around 3% over the next decade.

65 new charter schools opened in the fall of 2017, but this followed 46 closures from the prior spring, for a net gain of only 19 schools statewide. The demand has become centered in urban centers and areas with stronger population growth. By precluding new market entrants with lower cost structures, the legislation helps ensure the competitiveness of schools with outstanding debt as well as market demand for existing school facilities in the event of a charter school closure.

MISSISSIPPI FUNDS INFRASTRUCTURE

Mississippi has gained notoriety for the poor condition of many of its bridges and has been serving as an unwilling poster child for the issues underlying the national infrastructure debate. 12% of the state’s bridges deemed structurally deficient. The state has taken a step forward toward funding and addressing its most glaring infrastructure needs through several pieces of recent legislation.

The laws include directing a portion of the state use tax for local roads and bridges, create a state lottery and codify the distribution of remaining BP settlement funds, will provide an estimated $220-$270 million in annual funds for sorely needed transportation and infrastructure projects and distribute $750 million of funds related to BP’s Deepwater Horizon oil spill settlement.

The first law, the Mississippi Infrastructure Modernization Act of 2018 (MIMA), diverts a number of revenue streams – most prominently 35% of the state use tax – to local roads and bridges, yielding approximately $120 million annually in infrastructure funds. It also approves the issuance of up to $300 million in revenue bonds for the Emergency Road and Bridge Fund ($250 million) and the Transportation and Infrastructure Fund ($50 million). The bill appropriates funding for several Infrastructure Fund projects in 2018, with notable project grants (greater than $2 million.

The statewide lottery – a long-contentious proposition – is projected by the state to generate $80 million in new revenue annually ($40 million in the first year). Until 2028, the first $80 million in revenue will be dedicated to the State Highway Fund. The BP Settlement law distributes the remaining $600 million of $750 million in settlement funds that the state expects to receive through 2033 ($40 million annually). The remaining 25% of the annual disbursement will be deposited into the state’s BP Settlement Fund for use on projects throughout the state. Of the nearly $100 million in funds currently held by the state (approximately $50 million has been already spent), $52.9 million will  be allocated to the Transportation and Infrastructure Fund.

As significant as these resources are and although they are received over time, they will effectively function as one shot revenues. The reality is that Mississippi will need to find some $400 million of recurring revenues to meet the state’s ongoing infrastructure maintenance and repair costs on an annual basis.

TEACHER PAY MOVES TO THE DISTRICTS AS AN ISSUE

Throughout the Spring, attention was focused on statewide teacher job actions in several states. They generally resulted in more funding for education at the state level. Now the attention focuses to local negotiations as districts grapple with the demands from teachers for their share of the newly enlarged resource pool. The latest battleground is in Washington state where teachers in four districts including Tacoma, with an enrollment of more than 29,000 students, or 2.6 percent of the state’s total. Across the state, some 53,000 students are out of school as negotiations take place.

The funding mechanisms have made it clear that the increased funding from the State mandated by the decade long school-finance case known as McCleary may not be the windfall expected. The extra money also automatically opened teacher contracts for renegotiation in virtually all of the state’s 295 school districts. The Centralia School District received an extra $50 million this year, while cutting $46 million from a levy that the district relied on to fund its budget last year, resulting in a near-wash.

LITIGATION HURTS JEA RATING

S&P Global Ratings has placed its ratings on debt from the Jacksonville Electric Authority CreditWatch with negative implications: Its ‘AA-‘ rating on JEA, Fla.’s senior-lien, fixed-rate electric system, bulk power supply system and Saint Johns River Power Park debt; Its ‘A+’ rating on the utility’s subordinate-lien, fixed-rate, electric system debt; Its ‘AA-/A-1+’, ‘AA-/A-1’, and ‘A+/A-1’ ratings on several series of JEA senior and subordinate-lien variable rate debt; andIts ‘A-1+’ rating on the utility’s senior-lien, variable-rate demand bonds that are in the commercial paper mode.

The outlook revision is based on JEA’s Sept. 11 court filing asking a Florida state court to release it from a power purchase agreement (PPA) with the Municipal Electric Authority of Georgia (MEAG). The contract commits JEA to pay the first 20 years’ debt service on 41.175% of the debt MEAG has issued and will issue to fund its 22.7% interest in the two 1,100 megawatt Plant Vogtle nuclear units under construction in Georgia.  JEA’s Sept. 11 court filing asking a Florida state court to release it from a power purchase agreement (PPA) with the Municipal Electric Authority of Georgia (MEAG). The contract commits JEA to pay the first 20 years’ debt service on 41.175% of the debt MEAG has issued and will issue to fund its 22.7% interest in the two 1,100 megawatt Plant Vogtle nuclear units under construction in Georgia.  In the next month, the owners of Plant Vogtle will meet to decide on whether to continue construction. If ownership interests representing at least 10% of the project choose not to proceed, unless the courts provide JEA with a judicially sanctioned method of exit, abandonment could leave the utility responsible for debt service without an associated revenue-producing asset.

We understand S&P’s point of view but we believe that the litigation is a negotiating tactic on the part of JEA. MEAG has been steadfast in its view that the Plant Vogtle expansion should continue. This is unlike the situation in South Carolina where the state’s largest public power agency (Santee Cooper) is a partner in a nuclear expansion which has been suspended.  Both of these situations highlight the exceptional level of financial risk inherent in the construction of a nuclear power plant. The Georgia situation would seem to have a greater level of uncertainty attached to it versus the suspended South Carolina project. While both offer the potential for a rate impact the Georgia project presents a level of risk which cannot be fully measured at this time. In South Carolina, the costs are more certain.

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

$500,000,000

Las Vegas Convention and Visitors Bureau

Convention Center Expansion Revenue Bonds

Moody’s: Aa3

These revenue bonds are all secured by the authority’s first lien pledge of net revenues from hotel room taxes collected throughout Clark County as well as revenues from its convention facilities after the payment of operating expenses. The current issuance is also secured by the Las Vegas Convention Center.

The rating was upgraded in connection with this issue. Increasing hotel room rates are generating pledged tax receipts to new all-time highs. Average daily hotel occupancy has been uncommonly strong at 89%. These factors have combined to result in maximum annual debt service coverage of 3.0 times from fiscal 2017 pledged revenues. The issue represents a significant increase in debt but the coverage levels provide sufficient cushion to absorb the new debt.

Las Vegas remains the nation’s market leader for large-scale conventions. While total visitor totals show a slight drop from their peak, the tourist market remains strong. At 42 million visitors, the market for hotel rooms remains quite strong. With the market evolving from its gambling base to a much more diverse demand base centered on entertainment and recreation, the ability to maintain revenues growth is bolstered.

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GUAM

S&P Global Ratings affirmed its ‘BB-‘ long-term rating on the Government of Guam’s (GovGuam) general obligation (GO) bonds and its ‘B+’ long-term rating on GovGuam’s certificates of participation. The credit has become the object of interest for those seeking triple exempt income not derived from Puerto Rico. At the same time, S&P Global Ratings removed the ratings from CreditWatch, where they had been placed with negative implications on March 5, 2018. The outlook is stable.

GovGuam improved its general fund cash flow and its financial results for fiscal 2018 as a result of a fiscal realignment plan. It also succeeded in balancing its fiscal 2019 budget. Guam’s credit reflects increased stability. This has occurred at a time of improving economic conditions and activity. The tourism markets are more stable (Japan is a major source of tourist demand for Guam)and the US commitment to military spending given Guam’s significant a forward role as base in the Pacific.

THE PUERTO RICO CONUNDRUM The National Federation of Municipal Analysts has filed an amicus brief in support of the major bond insurers who are suing to prevent the “clawback” of tax revenues to provide funds to help to pay the Commonwealth’s direct, tax backed debt. A district court decision in the action is under appeal by the insurers and the NFMA has chosen to support the plaintiffs argument.

The plaintiffs argue that the application of the tax revenues pledged included in the security for the bonds to another purpose is improper. We do not disagree with the notion that the statutes authorizing the bonds are clear in their intent in terms of directing those revenues towards the authority’s bonds not the Commonwealth’s general obligation bonds. The question is though: which controls the pledge? The statute or the Constitution?

A plain reading of the official statement makes the risk of “clawback” pretty clear. The fact that there is lots of statutory authority that has never been reviewed in connection with a judicial validation proceeding should be viewed through a cautious lens. Until these statutory pledges are validated, there is a risk that the pledged funds will not be available. ” Market expectations regarding the treatment of Project revenues and revenue bondholders simply do not outweigh constitutional provisions.

We heard a lot about relying on the plain language of the Constitution during the past weeks Congressional hearings regarding the confirmation of Brett Kavanaugh to a seat on the Supreme Court. So applying the plain language test would not seem to be in the favor of the Authority’s bondholders. Their cause is also hurt by the fact that, if anything, the “subsidy flow” is usually from the utility to the general fund rather than the other way around.

We have long thought that reliance upon legal provisions is important but that the most important factor to insure the timely and full payment of debt service is underlying viability of the project or enterprise. In the case of the Highway Authority’s debt, a view of the overall economic viability of the Commonwealth that allowed debt holders to rely on true operating revenues would remove the risk confronting PRHTA creditors.

MUNICIPAL OVERSIGHT IN CONNECTICUT

Since the bankruptcy of Detroit was declared after the intervention of the State of Michigan in Detroit’s financial affairs, the various state oversight programs for distressed localities have undergone a higher level of scrutiny. The latest program to take the spotlight is the Municipal Accountability Review Board , Connecticut’s local financial affairs overseer. Currently, that board is evaluating the plans of West Haven which is seeking to have a financial recovery plan approved.

The Municipal Accountability Review Board (MARB) was established by Section 367 of Public Act 17-2  as a State Board.  It is to be composed of 11 members appointed as follows: Secretary of OPM, or designee, Chairperson, State Treasurer, or designee, Co-chairperson, five members appointed by the Governor: a municipal finance director, a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; ? a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT.

One member appointed by the President Pro Tempore of the Senate, one member appointed by the Speaker of the House of Representatives, one member appointed by the Minority Leader of the Senate and one member appointed by the Minority Leader of the house of Representatives, each of whom shall have experience in business, finance or municipal management. The board’s powers are not unusual. It has the power to review and approve or disapprove the municipality’s annual budget, including, but not limited to, the general fund, other governmental funds, enterprise funds and internal service funds. No annual budget, annual tax levy or user fee for the municipality shall become operative until it has been approved by the board.

West Haven is a Tier III city under the oversight program. A tier III municipality has at least one bond rating from a bond rating agency that is below investment grade, or (2) the municipality has no bond rating from a bond rating agency, or, if its highest bond rating is A, Baa or BBB, provided the municipality has no 18 rating that is not investment grade, and it has either (A) a negative fund balance percentage, or (B) an equalized mill rate that is thirty or more and it receives thirty per cent or more of its current or prior fiscal year general fund budget revenues were or are in the form of municipal aid from the state. West Haven is rated Baa/BBB. have the power to pass and implement an interim budget, raise the city’s tax rate or impose mid-year spending cuts and have greater latitude to approve or disapprove new labor contracts.

The city and the board have been working over the summer to achieve agreement over a budget and the City’s five year financial plan. The city is working to avoid Tier IV status which would allow the board to have the power to pass and implement an interim budget, raise the city’s tax rate or impose mid-year spending cuts and have greater latitude to approve or disapprove new labor contracts. The board would like to see the city build into the recovery plan a timetable to restore the city’s fund balance — currently in the red — to about 5% of the city budget.  That would require a fund balance of about $8 million in the City’s $162 million budget.

The city will consider a proposed financial plan this week which it hopes it can present to the Board for approval by the end of September. Approval would allow the city to collect significantly more state aid than has been available in the absence of an approved plan.

RATING AGENCIES IN THE GLARE

The latest comments to come from the entity investigating Puerto Rico’s debt issuance and subsequent default released its comments on the role of the rating agencies. When we summarize the findings, the intent is not to bash the rating agencies. Rather it is to highlight the fact that there is virtually nothing new in this latest critique. Instead, the comments reinforce existing feelings about the rating agencies approach to distressed municipal credits.

According to the report, “In light of the evidence we reviewed, reasonable minds can differ regarding the point at which the CRAs should have stopped relying on prospective information supplied by or on behalf of the Issuers, anticipated an increased likelihood of default, or taken more aggressive actions like downgrading Puerto Rico-related bonds below investment-grade status. Indeed, our investigation uncovered evidence that the CRAs had persistent concerns with respect to certain Issuers and their issuer-supplied information prior to the 2014 downgrades.

“There is evidence that, in hindsight, there may have been a basis to take earlier or more aggressive action to change the positive ratings of certain Puerto Rico-Related Bond ratings. At least some of the CRA Analysts with whom we spoke identified longstanding concerns…. There is also evidence that certain CRA Analysts were skeptical of prospective issuer-supplied information,”

One would hope so. But the comments highlight a dilemna faced by the rating agencies when deciding that they will lower a distressed credit’s rating. The rating agencies do not want to be seen as market moving actors or even more especially a hindrance to issuer access to capital. This alone explains the belief of many who manage and or actively trade bonds that bond ratings are lagging rather than leading indicators.

Bottom line: you have to do your own homework. This is already the case for institutions and hopefully will become more of a practice among individuals. Ask questions, look at rating reports, but don’t use these as a substitute for common  sense and a healthy skepticism regarding the ultimate sources of information. Keep up with the news and if something looks wrong, it probably is.

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

$750 million

New York City Transitional Finance Authority’s (TFA)

Future Tax Secured Subordinate Bonds

Moody’s: Aa1

It may be a short week but what better time for a well known tried and true credit to make another appearance in the market. New York City Transitional Finance Authority bonds offer investors an opportunity to invest in the City while remaining somewhat insulated from the City’s general credit. The state legislature established TFA as a separate and distinct legal entity from the city. It did not grant TFA itself the right to file for bankruptcy. So there is that legal protection.

In terms of the City’s year to year financial operations, the statutory authorization for the bonds provides that both the city and the state retain the right to alter the statutory structure that secures TFA’s bonds. The city has covenanted not to exercise those rights related to personal income taxes if debt service coverage would fall below 1.5 times MADS on outstanding bonds. This means that the City can change the income tax base as was the case when  the abolition of the city’s income tax on commuters occurred and when certain items were removed from the sales tax base.

TFA’s original statutory authorization of $7.5 billion has been increased to $13.5 billion (plus $2.5 billion “Recovery Bonds”) for senior and subordinate lien bonds. In 2009, legislation was enacted permitting 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. As of July 31, 2018, the city had $35.8 billion of debt capacity.

The authorizing statute also provided for bondholder protections including the fact that 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).

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PUERTO RICO

The Commonwealth has been in the news primarily as the result of the news that the official death toll attributable to Hurricane Maria has been raised from 64 to 2975. By now the shortfall in the federal response is obvious to all so there is no need to say more here other than to observe that the difficulty in generating real data about the storm and its aftermath are clearly an obstacle to reaching a resolution of the Commonwealth’s effort to restructure its debt.

It is easy to focus on the federal shortcomings but it becomes clearer that the Commonwealth government has much to answer for itself. As the data about the death toll has come out, the emphasis on that data has served to obscure the government’s continuing lack of realism when it comes to the realities of the Commonwealth’s finances. This is clear when one views the debate over whether or not to continue the practice of awarding Christmas bonuses to government workers.

The ongoing debate between the government and the PROMESA fiscal board continues. The debate is fueled by a mixture of pride and political factors which ignore the realities of the current situation. There would not be demands for more and timely operating information which some in the island’s body politic continue to resist. The fact that the Commonwealth has no history of credibility to fall back on in terms of its ability to provide accurate and timely information to its many and varied stakeholders continues to overhang any of the currently ongoing negotiations whether they involve the government and the board or the government and its creditors.

We are not looking for the government of Puerto Rico to turn over all of its sovereign rights but it would be helpful for it to accept the reality that the effort to shift losses onto creditors is only going to work if accompanied by a real effort to upgrade the government’s willingness to significantly improve its performance. Only by establishing a track record of accomplishment can it establish the level of credibility needed to persuade stakeholders to allow Puerto Rico more autonomy.

SOME VOTERS APPROVE TAX HIKES FOR SCHOOLS

Many have wondered if this past Spring’s labor unrest in the education sector would do anything to alter the trend of tighter and tighter revenue constraints which keep school district’s from addressing the wage concerns which generated the unrest. This year’s state budget cycle did produce some improvement in school funding at the state level but the real test comes at the local level when local taxpayers are asked for more revenue.

In at least one case, the recent evidence is positive. On 28 August, voters in Florida’s Broward County School District approved a one-half-mill property tax increase, primarily earmarked for salary increases for teachers. The tax runs through fiscal 2023 (which ends 30 June 2023), after which it will expire if voters do not renew it. The salary increases will sunset when the tax sunsets in 2023, unless voters renew the tax. The vote comes in the wake of a minimal funding increase from the state.

At the end of fiscal 2017, the district had an available operating fund balance of $157 million, equaling a narrow 5.9% of revenue, and an operating cash balance of $491 million, or a moderate 18.5% of revenue. In fiscal 2017, Broward schools received approximately 41% of the district’s $2.66 billion in operating revenue from the state. For fiscal 2019, the district’s basic state aid (through the Florida Education Finance Program) funding increased by just 0.96%, or $18.8 million.

BRIGHTLINE GETS ITS BONDS (AND THEIR SUBSIDY)

Florida’s monument to private enterprise – the tax exempt bond funded Brightline – received another subsidized boost when its was announced that the board of the Florida Development Finance Corp. unanimously signed off on a $1.75 billion bond issue for the Brightline rail service. The tax exempt bond will bankroll its expansion to Orlando.

The announcement comes as data on the service’s operations between Miami and Palm Beach have become available. Brightline’s ridership numbers have fallen far below its own projections. In a bond document in late 2017, Brightline predicted 2018 ridership of 1.1 million and passenger revenue of $23.9 million. During the first three months of 2018, Brightline said it carried just 74,780 passengers who spent $663,667 on tickets.

Brightline management says that ticket sales have been increasing. He said focusing on early ridership numbers before Brightline began serving Miami is “out of context and unfair.” Brightline told bond investors last year that in 2020, it expects to ferry 2.9 million passengers and collect $96 million in fares. Brightline told bond investors last year that in 2020, it expects to ferry 2.9 million passengers and collect $96 million in fares.

The debate over the bonding authorization has highlighted some other facts about this private enterprise. Palm Beach and other counties as well as municipalities along the route are responsible for the maintenance of its grade crossings.

A STREECAR NAMED DE BLASIO

One of the ongoing debates in New York is how and where to find the resources to address the City’s well publicized difficulties experienced with its mass transit system. Owned by the City but funded and operated by a state agency, the system’s problems have been the source of a regular but unproductive debate between Mayor DeBlasio and Governor Cuomo. It has become an issue in the ongoing Democratic primary campaign for Governor.

So it may seem strange that now is the time which the mayor has chosen to announce the revival of his plan for a streetcar system to serve neighborhoods along the Brooklyn-Queens waterfront. The DeBlasio Administration announced that it will move forward with the proposed Brooklyn Queens Connector (BQX) streetcar following the completion of a two-year feasibility study.

Honorable people can disagree over the necessity of the new system and how it will be funded. One thing that all can agree on is that funding for urban mass transit is under attack by the Trump Administration. So it is surprising that the Mayor’s announcement included that it will seek federal funding, among other sources, to deliver the project. The funding sought from the federal government is estimated at $1 billion.

At a time when much more regionally beneficial projects like the Gateway tunnel continues its uphill battle for federal funding, it seems like quite a reach to hope that 37% of the projects cost will be picked up by the federal government.  Nonetheless, that is the plan. How the other portions of the funding needed will be generated is left to the future.

The needs of the existing bus and subway system are pretty clear. Less clear is the need for this project. For instance, at planned service frequencies, ridership modeling indicated significant spare capacity during BQX’s opening years, with peak demand potentially approaching available capacity at scheduled frequency in 2050. In the meantime, the subways are bursting at the seams and the streets are overcrowded by ride sharing cars that limits on their number have recently been enacted. So it seems like a strange time to emphasize this project.

 

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.