Joseph Krist

Publisher

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ISSUES OF THE WEEK

A number of established issuers are scheduled to come to market this week with significant issues.

The largest issue is for NYC GO debt ($855,560,000). The issue comes as the city’s electorate selects in candidates in party primaries. The mayor is expected to cruise to victory in both the primary and general election, implying no changes in fiscal policy.

The MN Board of Regents plans some $424,775,000 of new 424,775 money and refunding revenue bonds which unconditional, direct and general obligations of the university.

The TN State School Bond Authority will issue $239 million of new money bonds and $154,170,000 of refunding bonds. The bonds are secured under provisions whereby State appropriations for each institution are available to bondholders for debt service if the institution does not make debt service payments to the bond trustee on a timely basis. Student fees and charges for the institutions are pledged to bond  holders.

Reedy Creek Improvement District is a public corporation, created by a Special Act of the Florida Legislature in 1967 to provide municipal services within its boundaries, primarily for one customer, Walt Disney World. The Walt Disney World Resort Complex – its theme parks, recreational facilities, hotels and film studio – dominates the 40-square-mile district and comprises 85.2% of fiscal 2017 taxable value. It plans to issue $195,195,000 of tax backed bonds.

Idaho Energy Resources Authority (IERA) will issue $200 million of revenue bonds backed by lease payments from the Bonneville Power Administration made unconditionally directly to the bond trustee. this security structure offsets some longer term concerns about the BPA credit which reflect the fact that hydrology and wholesale market prices are the greatest volatility drivers of BPA’s financial performance and have been the main driver of BPA’s declining internal liquidity over the last ten years.

These factors are likely to persist owing to the volatility associated with hydro resources along with the weak wholesale power that exists in the Pacific Northwest. Additionally, BPA’s accelerated repayment of federal appropriations debt and declining availability under the US Treasury line are continuing factors that diminish the US government’s explicit support features over time and weakens BPA’s positioning within its rating. After the FY 2018-2019 rate period, the combination of declining US Treasury line availability, declining internal reserves for risk, sustained weak wholesale power market and a reduction in the degree of federal debt subordination could lead to a negative rating action.

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CHICAGOLAND CREDIT ROUNDUP

The unending tide of rating pressure on the Chicago public Schools credit may have abated for now. When the state failed to pass an on time budget, the rating was put on review for downgrade by Moody’s. After a tumultuous state legislative process and override of a gubernatorial veto, Moody’s has reviewed its position. It announced that it confirms Chicago Board of Education, IL’s B3 GO rating. The outlook was revised to stable .

Moody’s cited its view that the district’s financial distress that will likely persist but not materially worsen in the coming year given new state and local revenues. The additional revenue should balance the district’s operations in fiscal 2018, but will leave little margin to rebuild liquidity from its currently extremely weak position. The district will remain heavily reliant on cash flow borrowing and likely face budget gaps in future years without further budgetary adjustments. The outlook also incorporates the district’s covered abatement structure on its GOULT debt, which reduces the likelihood of default outside of bankruptcy. The outlook is also supported by the close governance ties to the City of Chicago.

All of the district’s rated debt is secured by its GO unlimited tax pledge. The majority of the district’s rated debt is GO alternate revenue debt, which is additionally secured primarily by pledged state aid revenues. An unlimited tax levy is filed with the county at the time of issuance. The property tax is abated only after sufficient revenues have deposited with the trustee into a debt service fund. If the deposit is not made with the trustee, the levy is extended.

The district funded 670 schools including district run traditional schools and 134 charter schools. With an enrollment of 381,349 in fiscal 2017, the district is the third largest in the nation.

The Chicago Water and Sewer Revenue Bonds saw Moody’s confirm their Baa1 and Baa2 ratings (senior and subordinate liens). The ratings apply to $26 million of senior lien water revenue bonds, $1.8 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 outlook however, remains negative for the ratings.

The overlap in the service area with the City remains a concerning element in the ratings. The ratings also consider 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.  Moody’s view is that the credit profiles of the water and sewer systems, as business enterprises of Chicago, are connected to the city’s general obligation credit profile, which also carries a negative outlook due to very high tax base leverage and a very close governance relationship with a fiscally distressed school district.

As for the City itself, its Moody’s rating was confirmed at Ba1 with a still negative outlook. Moody’s noted that the city recently applied its broad taxing authority to raise new local revenue and accelerate pension funding, but new taxes remain far from sufficient to arrest growth in unfunded pension liabilities. The city’s new taxes also coincide with increases enacted by overlapping governments, such as Cook County and Chicago Public, the latter of which just received expanded taxing authority from the state. The rating considers long-term operating risks associated with rising costs and potential limited capacity to further raise local taxes, as well as the city’s very close governance and political ties to the fiscally weak CPS.

PUERTO RICO SPARED THE WORST

It says something when a storm causes 70% of the population to lose power but the impact of Hurricane Irma could have been much worse. Power outages initially  left about 17 percent of the territory without running water. Roughly 40 percent of the territory’s hospitals were functioning and were even accepting transfers of about 40 patients from the United States Virgin Islands.

The Virgin Islands fared much worse with substantial structural damage on St. Thomas. Even worse, The U.S. Virgin Islands has redirected money intended to help pay insurance claims after large disasters for other needs. Since 2007, nearly $200 million was transferred from the V.I. Insurance Guaranty Fund, including $45 million in fiscal 2011.

REGULATION NOT THE ONLY HURDLE FOR INFRASTRUCTURE

So far the Trump administration has focused on regulatory relief in its limited comments on infrastructure plan details. Litigation however is an additional hurdle even when funding for a project has secured voter approval. Santa Clara County voters last year overwhelmingly approved Measure B,  a half-cent sales tax to invest more than $6 billion in transportation infrastructure. The measure won more support than any transit tax in county history and was planned to fund bringing BART to downtown San Jose, upgrading Caltrain and highways, and expand the region’s network of bicycle and pedestrian paths.

The single plaintiff filed Litigation earlier this year. She is a retired urban planner from Saratoga who once sued Santa Clara County over its mosquito fogging and is holding Measure B hostage. $40 million has been collected to date.  The suit questions that the measure’s language was too broad.

The real issue behind her suit is her belief that an “ancient aquifer” beneath the site of the planned BART station downtown could collapse once construction commences. A judge dismissed her claim earlier this summer but, she appealed to a higher court. That review could extend the process for another year or more.

All Measure B tax revenue will remain in escrow until the court releases the funds. The suit is much like litigation which has held up Maryland’s Purple Line P3 as a small group of litigants pursues numerous appeals against the project through the federal courts.

It’s just another example of how tough it is to execute infrastructure whether public, private, or P3 in the current environment.

HARTFORD THREATENS BANKRUPTCY TO JUMP START STATE BUDGET

The city has been talking about it for so long that the latest threat to file for Chapter 9 could just be an effort to jumpstart the state budget debacle. In its latest pronouncement, Mayor Luke Bronin said Hartford would seek permission to file for bankruptcy if the city didn’t get the state aid it needs by early November. Specifically he said, “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.”

Projections show the city faces a $65 million deficit this year and will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. In 2016, the mayor laid off 40 workers and cut millions from city departments. He also used most of Hartford’s rainy-day fund to help offset deficits.

Still, Hartford had to borrow millions in June to help pay its bills.

He has asked for at least $40 million more this year from the state. As he has hinted before, “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations.”

OKLAHOMA

Gov. Mary Fallin intends to call for a special session on Sept. 25 to make adjustments to the current fiscal year’s budget. The session results from the Oklahoma Supreme Court decision rejecting a proposed cigarette tax that resulted in a $215 million budget shortfall. The $1.50 fee on every pack of cigarettes was earmarked for four agencies: The Oklahoma Health Care Authority, the Alcoholic Beverage Laws Enforcement Commission, the Department of Human Services and Department of Mental Health and Substance Abuse Services. With federal funds that are tied to state appropriations, those agencies stand to lose an estimated $500 million.

Without a new source of revenue, and if lawmakers spread the cuts across all state spending, all appropriated agencies could lose more than 3 percent of their spending authority. Some support a cigarette tax but want to see other revenue measures alongside it. Those legislators seek to raise the tax rate on oil and gas production.

If there is not a legislative fix, a cigarette tax proposal will be put to a statewide vote.

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

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

$595,720,000 Motor Vehicle Surcharges Subordinate Revenue Bonds

Moody’s: Baa2

This is the first rating from Moody’s on the subordinate lien for this credit. The bonds are secured by a subordinate lien on motor vehicle surcharges and unsafe driver surcharges, subject to legislative appropriation. After appropriation, the pledged revenues will be transferred monthly to the EDA by the state Treasurer pursuant to state statute and a contract between the two parties.

If you have ever paid a speeding ticket in New Jersey, you have supported this credit. It is, as revenue bonds go, a fairly narrow stream of revenues and as driving decreases is vulnerable to decline. The use of proceeds is not the best. Originally, the program financed loans and grants to governmental, not-for-profit, and private developers to provide permanent housing and community residences for individuals with special needs and mental illness.

Now the program supports state General Fund operations and capital improvements to the Motor Vehicle Administrative Office of the Courts. So capital funds are used for operating expenses. This issue in particular will refund a portion of the Motor Vehicle Surcharge bonds (senior lien) into a new subordinate lien resolution, for estimated net present value savings that the state will take upfront in the first year for budgetary relief.

So the fiscal gimmickry continues under the Christie administration. The credit remains tied to that of the State. So of the risk is mitigated by the structure of the issue which includes a turbo feature on the last five maturities that will likely decrease future debt service and reduce revenue risk, as well as an Advance Account that provides liquidity against a timing mismatch between revenue collection and debt service payments.

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MASSIVE BOND ISSUE DECLARED TAXABLE

Whenever there is a large scale natural disaster, one of the ways that Congress addresses the resulting capital needs of a recovering area is to authorize special municipal bond issuance authority. The issuance is authorized for projects in designated areas and the bonds must usually be issued within designated time limits. We expect that this will be one of the mechanisms employed in the program of relief in the aftermath of Hurricane Harvey, just as was the case with hurricane Katrina and the Liberty Bond program for New York after 9/11. One of the characteristics of these programs is that they often result in some dubious financings.

That factor was revisited recently when it was announced that  the Internal Revenue Service has preliminarily determined that $1.26 billion of economic development revenue bonds as well as refunding bonds issued for Indiana-based Midwest Fertilizer Company are taxable.

Midwest Fertilizer is sponsored by one of the largest conglomerates in Pakistan. The company disclosed on July 27 that the IRS had issued a “Notice of Proposed Issue” stating that the revenue and refunding bonds violate federal tax laws and are therefore not tax-exempt.

One of the first cautionary signs was the fact that the Indiana Finance Authority issued the $1.3 billion of bonds for the project in the latter half of December 2012 to take advantage of the Midwestern Disaster Area Bond program, which expired at the end of 2012. My experience has led me to call the post Thanksgiving period “the silly season” in the high yield market. Deals like this one are one of the reasons.

Away from the size of the deal and the type of project, the deal was plagued by a number of other questionable characteristics. The bonds were issued in late 2012 to build a state-of-the-art, nitrogen fertilizer production plant on 220 acres in the county, which is located in the Southwestern corner of the state. The cost of the plant is now expected to be almost $3 billion, according to a Midwest Fertilizer press release dated July 27 of this year.

While it was offered under a program of disaster relief, it was a new project. As for immediate relief, groundbreaking of the project is now expected in 2018 and the plant is not expected to begin operating until 2022 – some twelve years after the disaster. It is designed to produce about 2 million tons annually of ammonia, urea ammonium nitrate solution and diesel exhaust fluid, a diesel additive that reduces diesel exhaust emissions.

In order to land the project, the Indiana Economic Development Corp. (IEDC) had offered an incentive package accepted by the company on Nov. 30, 2012, that included access to tax-exempt financing through the allocation of a portion of the state’s volume cap under the disaster bond program.

The package included up to $2.9 million of conditional tax credits and up $400,000 training grants based on the company’s job creation estimates. It also offered the company up to $300,000 in conditional incentives from the Hoosier Business Investment tax credit. But the IEDC made clear that the company would have to create jobs and invest in Indiana to receive the incentives. Additionally, Posey County agreed to provide a tax incentive package under which certain tax increment revenues and special assessments would be applied over a 25-year period to repay tax increment and special assessment bonds.

The company told the state it would create more than 2,500 construction jobs and as many as 200 ongoing regulator and contract employment opportunities. It also said U.S. farmers in the state would benefit from its fertilizer product.

While Midwest Fertilizer is a U.S. company it is actually owned by multinational investors, the principal one being Fatima Group, one of the largest conglomerates in Pakistan. The U.S. Defense Department’s Joint-Improvised-Threat Defeat Agency (JIDA) determined that the Fatima Group had been “less than cooperative” in implementing security for its fertilizer products to prevent them from being used in explosive devices deployed against American soldiers in Afghanistan and Pakistan.

Gov. Mike Pence, a day after taking office in January 2013, halted state support of the project and then formally dropped all state involvement in mid-May of that year. Posey County stepped in and offered the company tax increment incentives valued at $144 million and up to $480,000 in employment incentives. In spite of all of the questions about the company’s background, Gov. Pence sought to revive Indiana’s support for the project.

In the meantime, Posey County became the project’s main supporter and refunded or remarketed the bonds six times between July 2013 and November 2015. Over that period, Posey County and the company agreed to a revised tax incentives package. Midwest Fertilizer since executed a purchase of all of the bonds through a mandatory tender.

Unanswered is the question of how anyone thought it was a good idea to use scarce private activity bond capacity and create a revenue loss to the US Treasury to support an entity that could not prove that its products were not used to kill and maim US servicemen. A clear example that the road to hell is paved with good intentions.

WHY HOUSTON GETS FLOODED SO BADLY

Shortly after the Allen brothers chose to establish Houston at the confluence of Buffalo and White Oak Bayous, virtually every structure in the new settlement flooded. After the tremendously destructive floods of 1929 and 1935, on April 23, 1937, after local leaders petitioned the State of Texas, the 45th Texas Legislature unanimously passed the bill that created the Harris County Flood Control District and established the Harris County Commissioners Court as the District’s governing body. The Harris County Flood Control District originally served as the local partner for the U.S. Army Corps of Engineers for flood control projects.

Costly floods were almost an annual event. More homes and businesses were built in improvident locations, prior to establishing the standard of the 1% (100-year) flood. Throughout Harris County, close to 30 damaging floods have occurred in the area, resulting in hundreds of millions of dollars in damages in just under 70 years. Flooding problems continued, with 21 damaging storms from 1950-1980. Since 1986, there have been six “100 year” floods in Harris County. A major flood still occurs somewhere in Harris County about every two years. No area of the country has received more federal disaster aid over the years as the result of floods than the greater Houston metropolitan area. More flood insurance funds have been paid here than in any other National Flood Insurance Program-participating community.

Many have said that going forward the topic of Houston’s lack of zoning regulations is effectively off limits for debate. It is fair to say that four and a half feet of water was going to be catastrophic in any event. At the same time, it is not wrong to say as Governor Greg Abbott did that “it would be insane for us to rebuild on property that has been flooded multiple times. I think everyone is probably in agreement that there are better strategies that need to be employed.” Unfortunately, we have heard such talk before but the sentiment usually fades with time.

HOW WILL THE HURRICANE IMPACT CREDIT?

Initially, there is no expectation that ratings will be impacted. Damage needs to be assessed, resources identified, and a timetable for repair and relief established. Experience tells us that the rating agencies will let all of this unfold before taking any action. The potential exists for short-term defaults due to administrative issues but these are usually resolved quickly as banking and municipal facilities are reopened and records recovered. This is more likely to be true for smaller municipalities where records are less likely to be electronically compiled and maintained and where staffing is minimal even during normal operations.

For the larger entities, any impact will be longer term. The State has indicated that it will rely on its estimated $10 billion rainy day fund until outside resources are delivered. The State Legislature is not scheduled to convene again until January, 2019 but the Governor is able to call it back into a 30 day special session if necessary.

CAVS ARENA PLAN BACK FROM THE BRINK

The Cleveland Cavaliers will reconsider the decision to pull out of a $140 million deal to renovate Quicken Loans Arena now that referendum petitions have been withdrawn. A faith based coalition has announced that it was withdrawing petitions for a voter referendum on financial support for the renovation of the 22 year old facility. The group was holding the deal hostage for more County investment in mental health facilities. Like many areas, cuts in such funding have made prisons the primary place for the severely mentally ill to be housed.

 

The Cavaliers’ owner, Dan Gilbert, had announced that he would not go ahead with the project (the same Dan Gilbert who has invested so heavily in downtown Detroit) if a referendum was required. A delay in the renovation was connected to the potential loss of an NBA All Star game and the project was seen as a source of jobs. It was claimed that no new tax revenues would have been needed for the project.

 

The initial plan for the makeover of the 22-year-old arena was to be financed jointly by the Cavs, the city of Cleveland and the county. The deal included a lease extension that would ensure the Cavaliers will remain at the arena through 2034, a seven-year extension of the existing lease. Interest on two, $70 million bond issues would bring the cost over 17 years to $282 million. The Cavaliers would pay $122 million of that in increased rent, while the city and county would cover the remaining $160 million.

The arena is publicly owned, by the city and county through the Gateway Economic Development Corp. The county would issue bonds that would be repaid by available funds from existing local admissions and hotel taxes, and from increased rent payments from the Cavs. The city is involved because part of the financing for the renovation will come from a city admissions tax.

As we go to press, Puerto Rico and the Virgin Islands are being impacted by Hurricane Irma. experience tells us that damage will be significant and that both entities will be even more reliant on federal aid given their very weak financial positions. The storm will add to the already high burden of negative credit factors facing them. The potential exists for the storm to be a final crippling blow to efforts to keep the Virgin Islands effectively solvent. It highlights the lack of viable alternatives for investors looking for the benefit of triple tax exempt income in the face of Puerto Rico’s ongoing fiscal crisis. We expect to have much clearer information in next week’s edition.

 

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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For what it’s worth, this is the 200th edition of the Muni Credit News since we started publishing in the fall of 2014. Over that time our regular readership has steadily expanded and we continue to achieve new levels of readership on a monthly basis. We hope to continue to deliver the kind of timely and actionable information and insights that support your investment in municipal bonds.

For the rest of August, 2015, we will be taking what we hope is a well deserved break from publishing. We will return the first week in September when we will return to our original weekly schedule. We will continue to generate the same volume of and hopefully, quality of product that we have been providing twice weekly. Our hope is that the Muni Credit News continues to be one of your primary tools as you navigate the ever more complicated municipal bond landscape.

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PURPLE LINE GETS A WIN

It was an active and potentially pivotal week for Maryland’s Purple Line. The Federal Transit Administration  joined the Maryland Transit Administration in its appeals case in efforts to get the Purple Line project moving. FTA experts have already offered a view in favor of the Purple Line and concluded that a delay is not necessary. The take the position that additional environmental studies are not necessary. Plaintiffs against the Purple Line say the latest environmental impact study doesn’t fully address issues of cost and ridership and is missing important information on about “how Metro’s decline in ridership and safety and reliability would affect the Purple Line, which would depend on it.”

The appeal turned out to be somewhat successful for the project. A federal appeals court ruling will allow Maryland to begin building the Purple Line while a lawsuit opposing it continues, clearing the way for the state to pursue federal funding for the light-rail project.  The U.S. Court of Appeals for the D.C. Circuit reinstated the Purple Line’s environmental approval, which a lower-court judge had revoked last year, while the legal case continues.

The ruling allows the state to continue its efforts to obtain $900 million in federal grants for the line’s $2 billion construction costs while Maryland’s attorney general appeals an earlier ruling in the 2014 lawsuit seeking to block it. Congress has appropriated $325 million to the Purple Line, but the state can’t access that money until a full funding agreement is signed.

CYBERSECURITY

The ongoing investigations by the Department of Justice, Office of the Special Counsel, and the intelligence community have shed light on a number of facets of Russian hacking and cybersecurity issues. We were intrigued by an MSNBC report focusing on the activities of a large and successful Russian based cybersecurity firm, Kaspersky Lab. Kaspersky Lab’s products include anti-virus software which is sold throughout the world. It is even available to individuals and others through chains like Best Buy. Concerns have been raised about the use of such software by American consumers given the alleged events of 2016 and suspected links between the company’s founder and CEO and the Russian intelligence services.

The federal government has used some Kaspersky products but the company has been removed from its list of approved vendors. Nonetheless, the Washington Post has found that several local governments across the U.S. are using Kaspersky security software. More troubling is that many of the cities and government entities using it were unaware of the federal action.

Among the entities are Portland, OR, Picayune, MS, San Marcos, TX, the State of Connecticut Public Defender Office, and Fayetteville, GA. The concern is that those systems, even if they are not protecting critical infrastructure, can be targeted by hackers because they provide access to much sensitive information. Even if an entity’s main systems do not use the software, employees connecting remotely through computers using the software provide a gateway for mischief.

The concern comes from the background of the firm’s founder. Kaspersky Lab was founded in 1997 by Eugene Kaspersky, only ten years after he had graduated from a KGB-supported cryptography school and had subsequently worked in Russian military intelligence agencies. He denies any connection to the Kremlin and insists that his company, despite its US presence and global footprint, has never been solicited for help by the Russian government. In the US, Kaspersky Government Security Solutions, or KGSS, had been hosting an annual cybersecurity summit in Washington. The acting FBI director, CIA Director, Director of National Intelligence and National Security Agency Director all testified before Congress this year they would not use Kaspersky.

It is just another front in the battle that municipalities face in their growing need to devote resources and stay ahead of the curve in terms of cybersecurity. It is clear that the level of risk associated with the use of technology by municipalities grows every day.

NUCLEAR PLANTS IN THE MIDST OF A BANKRUPTCY

Earlier this year, the primary contractor overseeing the construction at two nuclear plant expansions in Georgia and South Carolina –  Westinghouse – declared bankruptcy. The two plants are partially owned by the Municipal Electric Authority of Georgia and the South Carolina Public Service Authority respectively. The bankruptcy threw into doubt the ability of the plants to be completed. Already over budget, the projects risked further increases in cost related to potential delays in construction due to the uncertainty over Westinghouse’s ability to perform.

Late last week, Georgia Power finalized a new service agreement with Westinghouse for the Vogtle nuclear expansion – the first new nuclear units to be built in the United States in more than 30 years. Under the new service agreement, approved by the U.S. Department of Energy on July 27, Southern Nuclear (the Southern Company subsidiary which operates the existing units at Plant Vogtle) will oversee construction activities at the site.

The service agreement includes engineering, procurement and licensing support from Westinghouse, as well as access to Westinghouse intellectual property needed for the project. Georgia Power also continues work with the project’s Co-owners (Oglethorpe Power, MEAG Power and Dalton Utilities) to complete a full-scale schedule and cost-to-complete analysis of the project.

After that work is completed, it will rest with the Georgia Public Service Commission to determine the best path forward for customers.

At the Sumner plant expansion where South Carolina Public Service Authority co-owns the project a South Carolina Public Service Authority along with IOU South Carolina E&G, Toshiba Corp. also said Friday it has agreed to pay $2.168 billion to walk away from the two other unfinished nuclear reactors. Toshiba is the parent of Westinghouse. SCANA Corp and its partner, Santee Cooper, are more cautious about finishing the VC Summer nuclear units in South Carolina.

The project is years behind schedule. Santee Cooper and South Carolina Electric & Gas will halt work immediately on two nuclear reactors, ending months of deliberation over the future of the troubled project that already has cost consumers billions of dollars. Santee Cooper, a state-owned electricity provider, said early Monday afternoon it would stop construction on the partially completed power units in Fairfield County, which have cost South Carolina utility customers nearly $9 billion so far. The proposal was approved unanimously by the utility’s board at a meeting in Columbia.

Santee Cooper said it would seek to preserve the work that has been completed so far and look for buyers to take over the project. The utility now expects the project would cost 75 percent more than initially anticipated.  Santee Cooper says it is suspending construction. SCE&G refers to abandoning the project. The Santee Cooper board is interested in shutting down the construction in such a way that could make it possible to resurrect the project if future conditions make completion more attractive. SCANA however, needs to make sure that it is able to recover as much of the costs of the project as possible from customers to protect its shareholders.

While the payments from Toshiba are clearly mitigating to some of the risk to the co-owners of both projects, bondholders of the municipal agencies’ debt must be aware that these credits are still not out of the woods yet. Ratepayers will be saddled with higher than anticipated rate requirements for some time as the result of the Westinghouse difficulties. Santee Cooper has raised power rates five times to cover the cost of the project. Overall, the utilities’ competitive positions will have sustained long term damage no matter how the projects ultimately work out.

NO ROOM AT THE INN FOR DEBT SERVICE

It’s taken 12 years of underperformance and restructurings but he Lombard convention center hotel project has finally succumbed and entered Chapter 11 bankruptcy. The petition was filed this week by The Lombard, Ill. Public Facilities Corp. which issued the bonds. The 2005 project was initiated to host corporate meetings and other functions in the Chicago suburb. Like many of these projects, the 2008 financial crisis put a seemingly permanent dent in the demand for the kind of services these hotel facilities provide.

This was a project financing which was originally secured by project revenues as well as an agreement with the Village of Lombard to make up shortfalls in debt service. When the project failed to meet its initial projections for occupancy and revenues, the Village was called upon to meet its obligations. It declined to and the most junior tranches of debt service defaulted.

The project went through a restructuring in 2011  and the hotel operations limped along thereafter. Corporations have cut back nationwide in terms of their willingness to pay for offsite meetings and that change in demand has been deadly for more than one of these projects. It has become clear that without a significant additional restructuring, the project cannot cover debt service,

Among the project’s creditors are the bond insurance company ACA which insured some $53.9 million of the original issue of bonds. The Chapter 11 filing was undertaken pursuant to an agreement with the majority of bondholders.

PUERTO RICO DEBT INVESTIGATION

The fiscal control board confirmed that it will launch its own process to  investigate the causes of Puerto Rico’s fiscal crisis, including the commonwealth’s debt issuance, disclosure and selling practices. The findings of this investigation will be made public. The board will create a special committee that will appoint an independent investigator. The investigation will be carried out according to the investigative protocol recently approved by the board.

A committee representing unsecured creditors in Puerto Rico’s Title III bankruptcy cases filed a lawsuit July 21 for federal Bankruptcy Court Judge Swain to authorize a discovery process to investigate the role played by Banco Popular, Banco Santander and the Government Development Bank (GDB) in the issuances and transactions related to the commonwealth’s debt.

According to the panel, federal law empowers it to “conduct an investigation into Puerto Rico’s debt and its connection to the current fiscal crisis.”  The judge last week delegated the creditor committee’s request for investigation to Judge Judith Dein. The matter will be dealt with Aug. 9 as part of an omnibus hearing in San Juan for bankruptcy cases under Title III of Promesa. As for the mechanism used by the board to carry out the investigation, it recently approved a protocol to carry out “informal” and “formal” investigations into any matter it deems worthy, as Promesa allows.

The protocol was approved by the board during a May 26 executive meeting.

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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$550,000,000*

BAY AREA TOLL AUTHORITY

SAN FRANCISCO BAY AREA TOLL BRIDGE REVENUE BONDS

(Senior Bonds)

$550,000,000*

BAY AREA TOLL AUTHORITY

SAN FRANCISCO BAY AREA SUBORDINATE TOLL BRIDGE REVENUE BONDS

(Fixed Rate Subordinate Bonds)

BATA was created by an act of the state legislature in 1997 and began operations in January 1998 as the successor agency to California Transportation Commission’s Northern and Southern units of the San Francisco Bay Bridges. BATA’s mandate has been to manage the tolls on the seven Bay Area bridges and oversee the implementation of Regional Measures (RM)-1 and RM-2 approved by voters in two general elections. In July 2005 the state legislature passed AB 144 which granted BATA project financing and management responsibility as well as independent toll-setting authority for the bridges. The legislation also established the Toll Bridge Program Oversight Committee which has implemented a project oversight and project control process for Benecia-Martinez project and the SRP. The Committee consists of the Director of Caltrans, the Executive Director of the California Transportation Commission (the CTC) and the Executive Director of the authority. The oversight committee’s project oversight and control processes include reviewing bid specifications and documents, providing field staff to review ongoing costs, reviewing and approving significant change orders and claims and preparing project reports.

The senior lien bonds are secured by a prior claim on net toll revenues collected on the seven Bay Area bridges operated by BATA: San Francisco-Oakland Bay Bridge (SFOBB); San Mateo-Hayward Bridge; Dumbarton Bridge; Antioch Bridge; Benicia-Martinez Bridge; Carquinez Bridge and Richmond-San Rafael Bridge. The senior bonds have a cash-funded debt service reserve fund (DSRF) equal to the lesser of MADS; 125% AADS. The subordinate bonds are secured by a subordinate claim on the same net revenues and have a DSRF funded at maximum interest on the bonds at the option of BATA. All subordinate series currently have a DSRF equal to maximum interest.

The authority has independent rate-setting authority and no legislation or outside approval is required to adjust toll rates, though electronic and cash toll rates must be the same. The authority is required to increase tolls according to its adopted toll schedule in order to meet bond covenants, or for maintenance or construction. The authority must hold a public hearing and two public meetings 45 days before the toll increase, and provide 30 days’ notice to the Legislature.

$200,000,000*

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY

REVENUE BONDS

(LUCILE SALTER PACKARD CHILDREN’S HOSPITAL AT STANFORD)

The proceeds will provide funds for its expansion project, to fund routine capital expenditures and potentially acquire the long-term ground lease interest in land and improvements adjacent to the hospital for future use (owned by Stanford University). The bonds are secured by a gross revenue pledge of the obligated group. LPCH’s $1.2 billion hospital expansion project is almost complete, although the project is slightly behind schedule and cost overruns are likely. This bond issuance was unexpected and will provide another funding source for the sizeable project.

LPCH operates a 266-bed pediatric and obstetric hospital on the Stanford University campus in Palo Alto and 36 beds in several inpatient care units on its license in nearby community hospitals. In addition, LPCH manages several neonatal and pediatric units through joint ventures with other adult providers in the region. The obligated group includes only the hospital, which accounted for 98% of total assets and 94% of total revenue of the consolidated entity in fiscal 2016. Like many children’s hospitals,  LPCH has a strong track record in fundraising through the Lucile Packard Foundation with the last two capital campaigns raising over $1 billion. In the most recent campaign, $265 million is expected to be raised for the new facility and year-to-date $262 million has been raised with $256 million received in cash. The foundation is in the quiet phase of another campaign with a goal of raising $750 million.

Year-to-date fiscal 2017 operating results are negative due to one-time issues related to the loss of certain high-margin procedures. This impact was mostly in the first half of the fiscal year and the quarter-over-quarter trend has improved as LPCH has backfilled volume with the development of new related programs. The expectation is that fiscal 2018 operating performance will be in line with historical results.

$188,380,000*

REGIONAL TRANSPORTATION AUTHORITY

Cook, DuPage, Kane, Lake, McHenry and Will Counties, Illinois

General Obligation Refunding Bonds

Moody’s downgraded the Authority’s sales tax backed general obligation debt to A2 from Aa3, affecting about $2.2 billion of outstanding debt. The outlook remains negative. The outlook remains negative. The downgrade was tied to the State of Illinois’ ongoing fiscal instability. Payment deferrals have led RTA to rely on short-term borrowings that have created biennial refinancing requirements. This practice, while manageable, is only one measure of RTA’s potential stress stemming from the continuing financial erosion of its two largest related governments – the State of Illinois (Baa3 negative) and the City of Chicago (Ba1 negative). Over the long term, pressures to provide funding for constitutionally guaranteed state and local pension plans are increasingly apt to harm RTA’s economic base, eroding its ability to generate funding to support transit system capital investment and operating needs. Although these factors are outside the RTA’s control, they will pose increasingly serious challenges.

Nonetheless, the credit is seen as stronger than that of the State or City. The fact that the sales tax base includes the six county Chicagoland region is an important credit consideration. It also reflects the legal and practical insulation of pledged regional sales tax revenues.

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PUERTO RICO

As has been the case with the Puerto Rico restructuring process, the GDB process is running into significant opposition before it is even formalized. In spite of the fact that is has not yet been presented formally in the Legislature, San Juan Mayor Carmen Yulín Cruz announced Friday that she will challenge in state and federal courts a bill that seeks to validate the Government Development Bank’s (GDB) restructuring support agreement (RSA).

The bill is one of five to be considered in a special session called for July 31. It would create a new government entity that would issue bonds backed by GDB assets. The government bank’s bondholders and depositors, which mostly comprise municipalities, will have to select one of three tranches of notes. The plan is to close the GDB within a 10-year period.

The mayor of San Juan’s view is that the bill intends to prevent municipalities from going to court to demand reimbursement of funds they deposited in the GDB, which remain mostly frozen. Cruz’s position is that since the bill proposes to determine the balance of certain GDB liabilities, this confirms that the government bank “does not have clarity in its accounts” and is looking to “appropriate” certain funds deposited there.

Regarding the disbursement of special additional tax (CAE by its Spanish acronym) funds the bill would allow, the expressed a view that there could be preferences between towns and asked all mayors to prepare to fight the measure. “The request to the mayors is to do the math, because the money taken from them is money they won’t have available, unless they don’t start passing the problem onto citizens,” the San Juan mayor said, adding that the capital’s deposits would be used for essential services. This is true of the vast majority of the cities which deposited funds with the GDB.

NEW YORK

New York State is facing signs of increasing fiscal challenges, including lower revenue targets and possible federal budget and tax changes, according to a report on the state’s Enacted Budget Financial Plan issued today by New York State Comptroller Thomas P. DiNapoli. “The state’s fiscal outlook is clouded because of uncertainty in Washington, falling revenues, and fiscal practices that obscure the level of spending,” DiNapoli said. “If revenues continue to fall short, projected out-year budget gaps may grow further.” DiNapoli’s report found the state Division of the Budget estimates state tax receipts will increase by 4.8 percent in State Fiscal Year (SFY) 2017-18, below the 6.1 percent projected in February. Personal income tax receipts in the first quarter of the fiscal year were $1.7 billion lower than February projections and $1.5 billion lower than what was collected in the same period last fiscal year.

The General Fund balance at March 31, 2017 was $7.7 billion. Settlement money represented more than two-thirds of the total. By the end of the current fiscal year the balance is expected to be one-third lower than its recent peak of $8.9 billion two years earlier. Through March 31, the state has spent $3.1 billion from settlements received in the last three fiscal years. Nearly half has been used for budget relief. Another $461 million of these one-time resources is expected to be spent for budget-balancing purposes this fiscal year. The state is also using settlement funds for cash flow and debt management purposes.

The Financial Plan shows that spending from State Operating Funds will rise 2 percent this year, to $98.1 billion. This figure reflects several actions that complicate the picture of year-over-year spending growth. These include: the use of prepayments; certain program restructurings which result in costs being reflected as reduced receipts rather than disbursements; shifting spending to capital projects funds; deferring expenditures to future years; and the use of off-budget resources to pay for certain program costs. Adjusting for such actions, the increase in State Operating Funds spending is approximately 4 percent.

No deposits to rainy day reserves were made in SFY 2016-17, and none are projected in the current fiscal year. Reserves represented more than 13 percent of General Fund disbursements in SFY 2015-16, primarily because of settlement revenues. They are projected to decline over five consecutive years to less than 4 percent by SFY 2020-21. State-Funded debt outstanding is projected to rise 4.1 percent this year, to $63.9 billion, and to reach $73.7 billion by the end of the Capital Plan period. State-Funded debt service is expected to approach $8.4 billion as of SFY 2021-22, reflecting an average annual increase of 3.1 percent over the coming five years.

This outlook accompanies the news that State tax collections totaled $18.6 billion in the first quarter of the new fiscal year, $1.2 billion less than the same period last year and $315.7 million below projections, according to the latest state cash report issued by State Comptroller DiNapoli. “We’re three months into New York’s fiscal year and personal income tax collections are falling short of what was expected,” DiNapoli said. “Taxpayer anticipation of federal tax changes has contributed to the decline. Offsetting that, business tax collections are well over estimates.”

Through June 30, All Funds receipts totaled $37.7 billion, representing a decline of $680.6 million or 1.8 percent from a year earlier. The drop was primarily due to the personal income tax (down $1.5 billion or 11.6 percent) and miscellaneous receipts (down $640.8 million or 10.9 percent), but was partially offset by an increase in business tax collections (up $266.6 million or 16.5 percent) and federal receipts (up $1.2 billion or 9.2 percent). Overall tax collections totaled $18.6 billion through the first quarter, representing a decline of $1.2 billion or 6.1 percent from the same period last year.

All Funds spending totaled $41.1 billion in the first quarter of the fiscal year, approximately $3.1 billion or 8.3 percent higher than for the same period last year. Significant increases include spending for Medicaid (up $1.6 billion primarily from federal sources) and education (up $767.1 million). All Funds spending was $1.4 billion below projections, primarily in local assistance and capital projects. The General Fund ended June with a balance of $3 billion, which was nearly $4.2 billion lower than a year earlier but $548.3 million higher than the latest projection.

WHAT IS WISCONSIN DOING?

The deal announced that calls for $3 billion of state and local tax breaks for Taiwanese manufacturer to build a manufacturing facility in southeast Wisconsin has generated much comment. Much of it has questioned the basic underlying economics for the deal. Critics point out the Foxconn workers worldwide are much less productive than the average Wisconsin manufacturing worker. They also point out that the average compensation promised is about 50 cents an hour higher than the average wage in Wisconsin. Details made public so far do not indicate whether this annual amount is just salary but all in employee costs including insurance and other benefits. If it does than the hourly wage is below the private sector average in a state with a 2.9% unemployment rate.

This may account for the language in the state’s release that acknowledges a possible in-state worker shortage for the plant.  Given it’s proximity to Illinois, is Wisconsin subsidizing jobs for Illinois residents? Wisconsin is seen as promising to pay Foxconn the equivalent of $66,600 per employee, based on having 3,000 workers in the plant, for each of the next 15 years, while Foxconn is promising pay of less than $54,000 a year. Foxconn has implied that it could eventually employ 13,000 but it’s track record of keeping promises in other US jurisdictions is poor.

One analyst asks if it’s worth it for each Wisconsin household is stuck with a nearly $1,200 bill to subsidize a company that is half as productive as Wal-Mart, and one-tenth as productive as Harley-Davidson. Tax breaks for manufacturing jobs have been a topic of long term debate and the evidence is quite mixed at best.

CHANGES AT LAGUARDIA AIRPORT P3 STILL MAINTAINS PRIVATE ROLE

The Port Authority board signed off on a revised financing package for Delta’s facility update which is being undertaken separate from the overall renewal of LaGuardia Airport. Often times when issues arise for one of the private entities in a P3, the public entity in the partnership winds up increasing its financing risk.  Here, the Port Authority had agreed in January to enter a 33-year lease for the Delta terminal with an entity owned jointly by Delta and West Street Infrastructure Partners III, a fund managed by Goldman Sachs.

The entity was to contribute $300 million in equity investments and $3.6 billion in debt financing for the design, construction, and financing of a new 37-gate terminal. Now Delta plans to pay for nearly the entire project by itself after Goldman exited the deal. The Port Authority of New York and New Jersey will still contribute up to $600 million as previously agreed.

It is not clear why Goldman dropped out. Without Goldman, the equity component is no longer necessary and Delta will use a combination of direct investments and debt financing. Delta alone will be responsible for any potential cost overruns. It is good to see a situation where financing issues on the private side occur and they are solved on the private side of the P3 equation.

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 advisers prior to making any investment decisions.

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

______________________________________________________________________

PUERTO RICO

The government’s chief financial officer, asked the agencies to cut an additional 5 percent of the current budget in order to add $100 million to the government reserve requested by the fiscal control board. The purpose of the request is to add initiatives to avoid a reduction in the working hours of public employees or the elimination of their Christmas bonus on Sept. 1, the date imposed by the board for the government to demonstrate how it will put into effect the more than $400 million in cuts this fiscal year, which began in July.

At the same time, the Treasury secretary said that before the end of July his agency would send about $50 million in taxpayer refunds and that the rest—roughly $105 million more—would be sent in August to some 55,000 people. In fact, reimbursements are also a reason why the government requested an additional 5 percent budget cut to its agencies.

ROCKY MOUNTAIN REVENUE HIGH

It has been legal to sell marijuana for adult recreational use in Colorado since January 1, 2014.In the ensuing period, The state of Colorado has received more than half a billion dollars in cannabis-related revenue since legal adult cannabis sales began. Revenues are generated through a 15 percent excise tax on wholesale sales of cannabis; a 10 percent special sales tax on retail sales; applying the standard 2.9 percent state sales tax to adult-use and medical cannabis; and the application and licensing fees paid by adult-use and medical cannabis businesses. Local governments in Colorado are generating significant annual revenue by levying standard local sales taxes on cannabis products, enacting special cannabis-specific taxes, and collecting local application and licensing  fees. Localities also receive a portion of the cannabis tax revenue collected by the state government.

So what is the money used for? In FY 2016 and 2017, $117.9 million was used to fund school construction projects, and an additional $5.7 million was distributed to the Public School  Fund; $5.8 million was allocated for school drop-out prevention programs and bullying prevention and education, plus more than $4.5 million for grants to increase the presence of school health professionals; more than $16 million was allocated for substance abuse prevention and treatment, and $10.4 million was used for mental and behavioral health services.

SENATE COMMITTEE SETS UP TRANSPORTATION FUNDING SHOWDOWN

In a move that will please providers of and investors in mass transportation, The Senate Transportation, Housing and Urban Development, and Related Appropriations Subcommittee today approved its FY2018 appropriations bill with funding to advance transportation infrastructure development.  The bill provides $19.47 billion in discretionary appropriations for the U.S. Department of Transportation for fiscal year 2018.  This is $978 million above the FY2017 enacted level.  Within this amount, priority is placed on programs to improve the safety, reliability, and efficiency of the transportation system.

Especially pleasing to transit advocates is the fact that the bill includes $550 million, $50 million above the FY2017 enacted level, for TIGER grants (also known as National Infrastructure Investments). A House proposal more reflective of trump administration priorities would eliminate this program which has widespread support at the local level. In addition, the Senate bill calls for $12.129 billion for the Federal Transit Administration (FTA), $285 million below the FY2017 enacted level.  Transit formula grants total $9.733 billion, consistent with the FAST Act.  The bill provides a total of $2.133 billion for Capital Investment Grants (“New Starts”), fully funding all current “Full Funding Grant Agreement” (FFGA) transit projects, which is $280 million below the FY2017 enacted level.

Heavy rail will benefit as well with the Senate proposing $1.974 billion for the Federal Railroad Administration (FRA), $122 million above the FY2017 enacted level.  This includes $1.6 billion for Amtrak for the Northeast Corridor and National Network, continuing service for all current routes.  The bill also provides $250.1 million for FRA safety and operations, as well as research and development activities.

The bill also provides $92.5 million for the Consolidated Rail Infrastructure and Safety Improvement grants program, of which $35.5 million is for initiation or restoration of passenger rail, $26 million for Federal-State Partnership for State of Good Repair grants, and $5 million for Restoration and Enhancement grants.

HOUSING FUNDING

 Housing is another sector receiving Senate support despite a lack of interest from the Trump administration. HUD would receive $40.244 billion in discretionary appropriations, an increase of $1.4 billion above the FY2017 enacted level. The bill includes support for HUD rental assistance programs which provide housing assistance for nearly 5 million vulnerable families and individuals.  Of those receiving assistance, 57 percent are elderly or disabled.  This bill provides necessary increases to continue assistance to all families and individuals currently served by these programs.

Included in the bill is:  $21.365 billion for tenant-based Section 8 vouchers, $1.07 billion above the FY2017 enacted level; $6.45 billion for public housing, $103.5 million above the FY2017 enacted level; $11.5 billion for project-based Section 8, $691 million above the FY2017 enacted level; $573 million for Housing for the Elderly, $70.6 million above the FY2017 enacted level, and $147 million for Housing for Persons with Disabilities, nearly $1.0 million above the FY2017 enacted level.

All of these are categories which receive some level of capital funding through the municipal bond market.

MORE PASSENGER FACILITIES (PFC) DEBT COMING?

The Senate Appropriations subcommittee on transportation agreed to raise the federal cap on so-called passenger facility charges from $4.50 to $8.50 per flight, or $34 for a connecting round-trip. Airports have urged a hike in the fees as a way to fund construction projects such as improving terminals, with $100 billion in projects looming over the next five years. The airline industry strongly opposes the provision as a “secret tax hike”.

Airports issue bonds backed by passenger facilities fees as a way of keeping terminal rental and airline landing fees lower. These revenues can be applied solely to general airport revenue bonds. Airlines don’t like the fees because they appear on the passengers’  tickets thereby making the cost of a flight more expensive. The Senate legislation must still be reconciled with the House, which didn’t include a fee hike in its version of the bill.

The debate comes amid the release of first quarter airline fare trends. The average domestic air fare decreased to $352 in the first quarter of 2017, down 5.0 percent from $370 in the first quarter of 2016, adjusted for inflation but up 1.5 percent from $347 in the fourth quarter of 2016, the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported. The average domestic one-way air fare was $256 in the first quarter of 2017, while the average round-trip air fare was $417. Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase. The first quarter fare of $352 was the lowest first-quarter fare in the 22 years since BTS began collecting air fare records in 1995. The previous low was $370 in the first quarter of 2016. The first-quarter 2017 fare was down 28.3 percent from the average fare of $491 in 1999, the highest inflation-adjusted first quarter average fare on record.

STATES AND JOBS

The US Bureau of Labor Statistics released data this week on job growth trends across the country.  From September 2016 to December 2016, gross job gains from opening and expanding private-sector establishments were 7.5 million, a decrease of 185,000 jobs over the quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private-sector establishments were 7.1 million, an increase of 127,000 jobs from the previous quarter. The difference between the number of gross job gains and the number of gross job losses yielded a net employment gain of 376,000 jobs in the private-sector during the fourth quarter of 2016.

In the fourth quarter of 2016, gross job losses represented 5.8 percent of private-sector employment. Gross job losses are the result of contractions in employment at existing establishments and the loss of jobs at closing establishments. Contracting establishments lost 5.7 million jobs in the fourth quarter of 2016, a decrease of 6,000 jobs from the prior quarter. In the fourth quarter of 2016, closing establishments lost 1.4 million jobs, an increase of 121,000 jobs from the previous quarter.

If one were to look at recent budget trends across the states, one might see a correlation. Gross job gains exceeded gross job losses in 41 states, the District of Columbia, and Puerto Rico in the fourth quarter of 2016. Over this period, 25 states exceeded the U.S. rate of gross job gains as a percent of employment, which was 6.2 percent.

Alaska had the highest rate of gross job gains as a percent of employment, at 9.6 percent. Alaska also had the highest rate of gross job losses as a percent of employment at 10.0 percent, above the national rate of 5.8 percent. Connecticut had the lowest rate of gross job gains as a percent of employment at 5.1 percent. Tennessee had the lowest rate of gross job losses as a percent of employment at 5.0 percent.

ON WISCONSIN

Transportation has rightfully been sighted as the major sticking point holding up Wisconsin’s adoption of a new biennial budget. Education funding with its implications for school finance at the local level is also serving to hold things up. A new plan in the State Senate would increase per-pupil funding, from the current $250 to $654 over the biennium, and additional dollars for low-spending districts and private schools that take part in one of the state’s four voucher programs. It raise the income cap on the statewide Parental Choice program, which allows students outside of Milwaukee and Racine to attend private schools on vouchers. The cap would be raised from the current 185% of the federal poverty level to 220%, or about $54,120 for a family of four. At 220%, the Senate proposal would cost about $4.4 million, though that would be passed on to the local public schools, and is projected to increase enrollment in the statewide program by about 550 students.

Governor Walker’s  proposal would raise the state’s per-pupil aid from the current $250 to $450 in 2017-’18 and $654 in 2018-’19, at a cost of about $505 million. Revenue limits, which control how much districts can raise from the state and local taxpayers, remain unchanged for most districts. But low-spending districts, which were locked into those rates when revenue caps were imposed in the 1990s,  would be allowed to gradually raise their spending to $9,800 per student by 2022-’23.

Concurrently, it would increase funding for all four of the state’s private school voucher programs, however, most of the increase would be passed on to local public school districts in the form of cuts to their state aid. Per-pupil payments for the Milwaukee, Racine and statewide Parental Choice programs would rise from the current $7,323 to $7,757 in 2018-’19 for K-8 students and from $7,969 to $8,403 for high-schoolers. Per-pupil payments for students in the special needs scholarship program would rise from the current $12,000 to $12,434 in 2018-’19.

Clearly the trend is towards private schools and away from the public school system. This has negative implications for local school district tax pressures.

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

______________________________________________________________________

$608,000, 000

PORT OF SEATTLE

Intermediate Lien Revenue Bonds

Moody’s Rating: “A1”
S&P’s Rating: “A+”
Fitch’s Rating: “AA-”

The Port of Seattle is a municipal corporation of the state of Washington and owns the port’s marine facilities at the Seattle Harbor, the Seattle-Tacoma International Airport, and various industrial and commercial properties. The port operates Seattle-Tacoma International Airport (Sea-TAC), the primary regional air passenger service provider with a virtual monopoly in the Seattle area (69.4% origination and destination for FY 2016). The port has large and diverse revenue streams between and within its airport, seaport, and other divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County.

The airport division contributed roughly 78% of 2016 total operating revenues while other businesses generated 22% of revenues. The port’s debt service coverage ratios (DSCRs) for senior, intermediate, and all-in coverage were 5.9x, 1.8x, and 1.7x respectively in 2016.

$152,855,000*

CITY OF PHILADELPHIA, PENNSYLVANIA

Water and Wastewater Revenue Refunding Bonds

Fitch: “A+”
Moody’s: “A1”
S&P: “A+”

Proceeds will be used to current-refund all or a portion of the city’s outstanding series 2007B and advance-refund all or a portion of the outstanding series 2010C and 2012 bonds for savings and pay issuance costs. The majority of the savings, which will be taken annually, are expected to occur at the end of the scheduled amortization through 2032.

The bonds are secured by a senior lien on sewer combined net revenues of the Philadelphia Water Department’s (PWD) water and system. Philadelphia has historically had a problem with revenue collections for its municipally owned utilities.  Recently, Philadelphia announced a first-of-its-kind program to address the fact that some more than 40 percent of the city’s water utility customers are delinquent in paying their water bills, to the tune of about $242 million in uncollected revenue.

The city is attempting to take an approach which will charge lower water rates for households with incomes at or below 150 percent of the federal poverty line (which is roughly $3,075 a month for a family of four). Participating households will pay between 2 and 4 percent of their monthly income, which could mean bills as low as $12 a month. In 2016, a Philadelphia resident paid an average of about $71 a month in combined water, sewer and storm water charges. The city estimates that as many as 60,000 households are eligible for the income-based program.

The Philadelphia Gas Works operates a similar billing scheme. On the basis of that experience in part, legislation for a program for the water system was approved by the Philadelphia City Council in 2015. Research has shown that when gas and electric utilities charge affordable rates, customers tend to keep current with their bills. The Gas Works credit has seen pressure on it reduced as it has reformed its operations.

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BLUEGRASS STATE DOWNGRADE

Moody’s announced that it had assigned a Aa3 rating Kentucky Turnpike Authority’s Economic Development Road Revenue Bonds. In reviewing that credit, Moody’s also took the opportunity to downgrade Kentucky’s general fund appropriation lease-revenue bonds to A1 from Aa3, Kentucky’s agency fund appropriation lease-revenue bonds to A2 from A1, the Kentucky Public University Intercept Program programmatic rating to A1 from Aa3 and the Kentucky School District Enhancement Program programmatic rating to A1 from Aa3.

The wide ranging action reflects “revenue underperformance that will challenge the commonwealth’s ability to increase its very low pension funding levels. The commonwealth has one of the heaviest unfunded pension burden of all states. The commonwealth high fixed costs will also restrict fiscal flexibility.” Kentucky’s pension funding position has been among the weakest of all the states. While some recent steps have been taken by the Legislature to address the underfunding, the market has long perceived them to be inadequate and now the rating agencies are following that view.

Kentucky does not issue general obligation bonds itself but relies on lease-revenue bonds which are secured  by a state appropriation of rental payments either out of the general fund or agency funds. The downgrade of the lease-revenue bonds reflects their subject-to-appropriation nature, as well as relatively strong legal structure and essentially. The downgrade of the state aid intercept programmatic ratings reflects the one-notch differential between them and that of the commonwealth. The one-notch differential reflects generally average to strong state commitment, program history and program mechanics.

The downgrade impacts not only the Commonwealth’s cost of borrowing but also impacts those costs for its university systems, school districts, and localities which rely on state support for their borrowings.

ANOTHER AGRICULTURE WASTE PROJECT COMES TO HIGH YIELD LAND

Columbia Pulp, LLC is planning to develop and build a 140,000 ton per year pulp mill on a 449 acre site near the Lyons Ferry Bridge in Columbia County, Washington. The site is located in the heart of one of the densest wheat farming regions in North America. Farmers in eastern Washington pay millions of dollars annually for the right to burn straw, an excess by-product from wheat farming, resulting in thousands of tons of greenhouse gas emissions. An obvious, low-cost raw material, wheat straw has eluded commercialization by the North American paper industry due to limitations of existing pulping technologies.

Columbia Pulp will build and operate a facility in eastern Washington using a proprietary process to profitably convert straw into three product streams – pulp, sugars,  and lignin. The effort to finance the project has taken a number of twists and turns. It was the original plan to market bonds issued by the Washington Economic Development Finance Authority before the end of 2016. The company had received indications that an investor was going to buy at least half of the bonds,” according to the company. “It hadn’t even gone to market yet, but then the equity supplier couldn’t come up with the money.

The company then had to wait until the state reallocates bonds for 2017.  Now that it has done so the bonds can be issued but rates have risen. The company had designed its business plan around a 6-percent rate for the bond, now they’re looking at 8.5 or 9 percent. Once financing is secured, construction will begin immediately.

So once again the municipal high yield market will be tested with one of our least favorite credit mixes. The plant uses an unproven technology to produce a product for which there is no established market. The credit is non-recourse to any revenues or assets outside of the project. Throw in the inherent construction and startup risk that exists with any large scale industrial equipment construction and you have a formula for a very high risk speculative credit. Wood waste to fiberboard, manure to methane, rice straw just to name a few make one ask will the municipal market never learn?

CHANGES IN ILLINOIS FLOW DOWNSTREAM TO WISCONSIN

The director of the Wisconsin Legislative Fiscal Bureau has opined that the recently passed Illinois budget would negatively affect Wisconsin state revenues. Wisconsin has had an income tax reciprocity agreement with Illinois since 1973, where residents of each state who earn personal service income in the other state file a tax return and pay taxes on that income only in their state of residence. The reciprocity agreement  with  Illinois requires a compensatory payment when the net foregone revenues of one state exceed those of the other state based on a benchmark study of 1998 tax returns filed in the two states. Because the number of Wisconsin residents earning personal service income in Illinois exceeds the number of Illinois residents earning personal service income in Wisconsin, taxes foregone by Illinois exceed taxes foregone by Wisconsin,  and Wisconsin makes a reciprocity payment to Illinois each year based on the estimated difference. The payment is made each December from a sum sufficient GPR appropriation.

In the Governor’s budget, Wisconsin’s income tax reciprocity payment to Illinois is estimated at $66 million in 2017-18 and $67.6 million in 2018-19. The Bureau and the Department Of Revenue have re-examined the reciprocity payment estimates in light of the provisions in Illinois P.A. 100-0022 increasing Illinois’ individual income tax collections in 2017-18 and arrived at similar results. The recently enacted Illinois tax provisions are expected to increase Wisconsin’s 2018-19 reciprocity payment by an estimated $22.8 million to $90.5 million. However, based on income tax collections for both states through June, Wisconsin’s 2017-18 reciprocity payment is now estimated to be $64 million, or $2 million, lower than the amount  in the Governor’s budget. Combined, the re-estimates for the two years are $20.7 million higher than the amounts in the Governor’s budget.

The Illinois tax changes will also result in Wisconsin residents claiming larger credits for taxes paid to other states. Higher credit amounts will first occur in tax year 2017, and higher credit amounts in subsequent years will affect estimated tax payments. As a result, Wisconsin individual income tax collections are estimated to be lower by $12.9 million in 2017-18 and $17.2 million in 2018-19. When combined, the reciprocity and tax credit changes  are estimated to adversely affect the general fund’s position by $50.8 million in the 2017-19 biennium.

KEYSTONE STATE STILL CAN’T FUND A BUDGET

With its ratings under threat, the Pennsylvania legislature continues to debate how to fund the spending part of the budget which Gov. Wolf let take effect nearly two weeks ago without his signature. House members had rejected “in significant fashion” a plan to leverage annual payments from a 1998 multi-state settlement with tobacco companies to borrow enough money to cover a massive deficit in state finances. Alternative proposals have been floated to raise taxes on electric and natural gas utility bills, telephone services and cable bills.

The budget stalemate has also stalled nearly $600 million in state support for the University of Pittsburgh and Penn State, Temple and Lincoln universities, as well as the University of Pennsylvania’s veterinary school. If this all sounds familiar, it should as the Commonwealth is beginning to act along the lines of Illinois in terms of letting its budget problems bleed down to its educational institutions and non-profit service providers. We know how that turned out.

WESTCHESTER COUNTY MEDICAL CENTER OUTLOOK TO NEGATIVE

The Westchester County Health Care Corporation (dba Westchester Medical Center). Its main campus is leased from Westchester County. The Medical Center consists of four major facilities with 895 total beds. The major facilities comprising the Medical Center are: the main hospital in Valhalla, the Behavioral Health Center at Westchester, the Maria Fareri Children’s Hospital on the Valhalla Campus and the MidHudson Regional Hospital in Poughkeepsie, NY. Effective March 30, 2016 WCHCC entered into an affiliation agreement with HealthAlliance and WMC-Ulster, in which WMC-Ulster became the sole member of HealthAlliance.

Debt is rated Baa2 by Moody’s. The change in the outlook to negative reflects weak and lower than expected liquidity and significant challenges to restoring liquidity, increasing capital spending and likely leverage, and modest margins. Liquidity at FYE 2016 was notably weaker than expected, primarily due to a delayed large Medicaid supplemental payment. Although WMC received the payment in the first quarter of 2017, liquidity declined further due to the timing of a pension contribution and a NYSNA settlement, highlighting material quarterly variability. Challenges to restoring and sustaining liquidity include unpredictability of Medicaid payments, increasing capital spending which may require equity and spending in advance of state grant reimbursement, and the potential impact of installing a new IT platform.

WMC guarantees annual debt service for CHS. CHS is comprised of Good Samaritan Hospital of Suffern, N.Y., Bon Secours Community Hospital in Port Jervis, and St. Anthony Community Hospital in Warwick. CHS’s bonds are secured by gross receivables of the obligated group, which includes the hospitals only and excludes physician-related entities.

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.

PUERTO RICO – GDB

The first legal challenge to the proposed restructuring plan for the Government Development Bank (GDB) debt using an agreement with creditors under Title VI of Promesa that was approved by the island’s financial control board last week. The lawsuit—which names the GDB, the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA) and the Municipal Revenue Collection Center (CRIM y its Spanish acronym) as defendants—contends the bank’s restructuring support agreement (RSA) violates the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) and is unconstitutional.

The remedies sought by the city—the first to challenge the GDB’s restructuring deal—include a court order declaring Caguas’ rights as debtor may not be the object of a “qualifying modification” under Title VI of the federal law. The city claims in its suit that “to benefit a select group of creditors of the GDB, at the expense of the Municipality, its constituents and other creditors, the GDB and FAFAA are pursuing an unlawful arrangement, purportedly under the color of law, compelling the Municipality to not only receive the funds it holds at the GDB at a discount, but despite such loss, requiring that the Municipality continue repaying its municipal loans owing to the GDB in full (other than with respect to undisbursed loan proceeds), and in some cases, perplexingly also requiring the Municipality to make loan repayments it has already made under such loans, as if they had not been previously made.”

Caguas had approximately $230.3 million in debt, of which $81.1 million is owed to the GDB. Under the GDB’s advice, Caguas says it incurred in debt using its primary revenue sources for repayment. These include property, sales, operating and gross income taxes.

PUERTO RICO – PREPA

Creditors of the Puerto Rico Electric Power Authority (PREPA) are seeking to lift the Promesa law’s stay and appoint an independent receiver for the utility to oversee certain operations of the public corporation and which could result in increased rates. The motion, which has more than 1,000 pages, was filed Tuesday by National Public Finance Guarantee Corp., the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Syncora Guarantee Inc. They seek to enforce their rights after the island’s financial oversight board rejected PREPA’s deal to restructure its roughly $9 billion debt.

The motion comes a day after National and Assured amended a complaint they filed in June, in a separate process in U.S. district court against the fiscal board. the insurers modified their complaint to instead have the court declare that the RSA was a “preexisting voluntary agreement” as defined by Promesa—and thus had to be certified—and that the board’s failure to approve the RSA was unlawful under the federal law.

PUERTO RICO – RETIREMENT SYSTEM

Federal Bankruptcy Judge Laura Taylor Swain approved an agreement struck between the Puerto Rico government and a group of bondholders of the island’s Employees Retirement System (ERS). In the stipulation agreed to, she also scheduled a hearing for Oct. 31, during which the court expects to address a key dispute between the commonwealth and ERS bondholders over rights and remedies related to bonds secured by the government’s employer contributions to the retirement system.

According to the deal, the commonwealth will set aside more than $90 million through the next three months and a half, as well as pay roughly $14 million monthly in interest payments due through October—including a missed payment on July 1. These actions stay the ERS bondholder group’s petition for immediate relief and “adequate protection” as part of the ERS’s bankruptcy case under Title III of the federal Promesa law. By July 21, moreover, the government will commence an adversary action to have the court decide over the “validity, priority, extent and enforceability” of the liens and security interests asserted by the ERS bondholders, as well as the commonwealth’s rights over employer contributions received by ERS in May.

The stipulation calls for payment of some $14 million in interest due July 1 and missed by the ERS, after commencement of its Title III bankruptcy case. The ERS will also pay subsequent monthly interest payments until Oct. 1, or about $42 million in total. These payments will be covered by funds set aside by the commonwealth since January, pursuant to a previous stipulation struck between ERS and its creditors early this year. The commonwealth will set aside $18.5 million in a segregated account on July 31, Aug. 31, Sept. 31, Oct. 31 and two days after Judge Swain’s approval of the stipulation, or July 19, in addition to any money related to employer contributions made by the commonwealth to the ERS in late May.

During the Oct. 31 hearing, Judge Swain will address each side’s final arguments on these issues.

HEALTHCARE BACK FROM THE BRINK … FOR NOW

That sound you hear is a big sigh of relief over this week’s action or lack thereof on the plan to repeal and replace the ACA. There is no doubt that the short term result is positive for both state credits and healthcare credits. But the uncertainty resulting from the President’s reaction that he will “let Obamacare die” will hang over these sectors nonetheless.

First of all, does “let Obamacare die” mean withdrawing subsidies from insurance companies as soon as next month for those who participate in the state marketplaces? If it does, then that death will be significantly hastened. Second, if letting it die extends into 2018 then significant numbers of individuals will likely forego insurance do to its expense and the pressure on hospital operating budgets from the provision of un reimbursed care will begin to emerge. Third, state governments will then be under pressure to fill some of the gap as fiscal 2019 budgets are formed in the form of higher charity care subsidies to providers.

There is no doubt that the events of this week are positive for the two sectors. we just express caution over their staying power as positive drivers of credit performance over any extended period. For example, the  renewed effort at repeal would have ghastly consequences should it succeed. The CBO scoring of the latest iteration of repeal shows the number of people who are uninsured would increase by 17 million in 2018, compared with the number under current law. That number would increase to 27 million in 2020, after the elimination of the ACA’s expansion of eligibility for Medicaid and the elimination of subsidies for insurance purchased through the marketplaces established by the ACA, and then to 32 million in 2026.

Average premiums in the nongroup market (for individual policies purchased through the marketplaces or directly from insurers) would increase by roughly 25 percent—relative to projections under current law—in 2018. The increase would reach about 50 percent in 2020, and premiums would about double by 2026.

All of which would be negative for the state and hospital credit sectors.

MICHIGAN PENSION FUNDING

In his January 2017 State of the State address, Governor Rick Snyder announced the creation of a task force focused on addressing the unfunded pension and retiree health care liabilities of local governments in Michigan.  Of the approximately 1,800 local general purpose governments in Michigan, roughly one third provide post-retirement benefits. Due to a multitude of factors, many communities are now facing challenges funding the benefits to retirees. The total unfunded pension liability is estimated to be around $7.46 billion. The total unfunded liability for retiree health care is estimated at $10.13 billion. It is estimated that, for many Michigan cities, roughly 20 cents on the dollar goes to pay pension and OPEB costs.

the Task Force agreed on four main recommendations:  Greater reporting and transparency must be required of all local units to ensure a full understanding of the size and scope of the problem, and where the biggest challenges exist. This includes reporting using uniform assumptions to allow for better comparisons.  A pension and OPEB fiscal stress test system for local governments should be created to alert and assist local units in crafting solutions to best position them to continue to serve their residents, while funding their obligations and protecting benefits for employees and retirees. This system should identify and focus action on the local units experiencing the greatest fiscal stress.  This system, along with the creation of a new Municipal Stability Board (MSB), should assist in the review of a local unit’s finances and the development of a corrective action plan. The MSB should also provide research, training and technical assistance.  In addition to meeting existing constitutional and statutory requirements to pay pension costs, going forward all local governments should meet a minimum requirement to pay OPEB normal costs for new hires (i.e., to prefund new active employee’s current year obligation), if offered.

there were a few key issues for which there was fundamental disagreement:  Some Task Force members were opposed to the establishment of new funding requirements, concerned it would have too severe an impact on the local government’s ability to provide current services. While they recognized these liabilities as important, they maintained that the focus should be on making benefits more affordable and having adequate cash flow to maintain current services.  A majority of Task Force members were opposed to the establishment of plan design requirements for all local governments, believing that the local unit, through the collective bargaining process, should have the flexibility to agree upon what works best within their communities.  While the Task Force agreed to the concept of a MSB, it could not agree on the powers it would have. A majority of the Task Force members felt that the MSB’s role should be limited to making recommendations and providing technical support. A minority thought the MSB should be able to unilaterally impose changes if the local unit was unable to successfully implement a corrective action plan.

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

______________________________________________________________________

$597,715,000

NEW JERSEY TURNPIKE AUTHORITY

Turnpike Revenue Bonds

Moody’s: A2  S&P: A+

The ratings were affirmed for this issue reflecting the facilities essential nature for both the state and the region’s transportation network. The Authority operates the New Jersey Turnpike, a 122-mile, limited-access toll road that serves as part of the Interstate 95 corridor and the Garden State Parkway, a 173-mile, limited-access toll road and essential route for in-state traffic. Both are passenger car dominated roads and the two roads are New Jersey’s largest and most critical surface transportation assets.  The credit reflects the State’s active oversight of its operations which can be a damper on revenues and coverage. Demand has proven to be inelastic in times of both recession and natural disaster.

The Authority does have significant future capital needs so in some periods debt service coverage softens as the political ratemaking process catches up. A five-year executed agreement with the state has limited the credit risk of growing contributions to the state as it sets contributions through 2021 at only $795 million compared to $1.53 billion over the previous five years. Bondholders are entitled to a first lien on net system revenues for the senior lien bonds. The general resolution requires a debt service reserve sized at maximum annual interest. Currently the debt service reserve requirement is 100% cash funded, including the interest on direct placement bonds and if all sureties are included the reserve is greater than current maximum annual debt service; however, two of the surety providers had their credit ratings withdrawn after strong credit distress. The rate covenant in the general resolution requires net revenue to be the greater of the sum of aggregate debt service, maintenance reserve payments, special project reserve payments, and payments to the charges fund, or 1.2 times the sum of aggregate debt service (including net swap payments and unhedged variable rate payments calculated at the maximum rate).

$1,349,265,000*

DORMITORY AUTHORITY OF THE STATE OF NEW YORK

STATE SALES TAX REVENUE BONDS

S&P: AAA

The bonds are secured by a dedication of state sales tax in an amount initially equal to a 1% tax rate. The dedication is made from within the state’s existing sales tax collection and does not represent an increase in the overall state tax rate. The dedicated tax is separate and distinct from the 1% sales tax securing bonds of the New York Local Government Assistance Corp. and a $170 million payment to New York City, which secures sales tax asset receivable corporation bonds outstanding. After all of LGAC’s obligations are paid or discharged, projected on or before 2025, the state sales tax dedicated to the sales tax revenue bonds will increase to a 2% rate of taxation.  The sales tax base providing revenue for the bonds is one of the largest and most diverse in the nation. The segregation provisions requiring the pledged funds to be held by the State Comptroller and the requirement that they be applied to debt service before being used for any other purpose provide excellent insulation from state operating variations.

$353,120,000*

GEORGIA STATE ROAD AND TOLLWAY AUTHORITY

FEDERAL HIGHWAY GRANT ANTICIPATION REVENUE BONDS

Moody’s: A2

FEDERAL HIGHWAY REIMBURSEMENT REVENUE BONDS

Moody’s: A1

The ratings are based on strong debt service coverage from pledged federal transportation aid, the long history of the federal aid highway program, and ongoing federal support of transportation infrastructure spending, factors that are offset by a large structural imbalance in the federal Highway Trust Fund (HTF) and authorization risk.

Grant Anticipation Revenue Bonds (GARBs) to an interruption in the flow of federal transportation aid, hence the lower rating. For the reimbursement revenue bonds, this risk is minimized because federal grants that are received continuously through the year are set-aside on a monthly basis in advance of debt service payment dates. The need to account for this risk reflects the entanglement of federal highway funding in increasingly frequent late enactment of a federal budget.

$307,000,000

State of New Mexico

Capital Projects General Obligation Bonds

Moody’s: Aa1

The State comes to market in the aftermath of a contentious FY 2018 budget process. Like many resource dependent states, the FY 2017 budget was adversely impacted. The state did take timely action to rebalance the fiscal 2017 budget and bolster reserves in response to lower revenue estimates released in December. The state established of a Rainy Day Fund to capture future growth in oil- and gas-related revenues, which should support budget discipline in periods of increasing revenue.

New Mexico’s general obligation bonds are secured by the full faith and credit of the state and specifically secured by and paid from a statewide unlimited property tax levy. The treasurer is required to keep the property tax proceeds separate from all other funds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature. If at any point there is not a sufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment.

The state’s GO bonds represent only a small portion of its net tax-supported debt . Severance tax backed bonds are the main financing vehicle. Pension funding levels are considered to be about average.

_________________________________

GDB DEAL APPROVED

Puerto Rico’s financial control board announced it had “conditionally” certified a restructuring support agreement (RSA) between the island’s Government Development Bank (GDB) and its creditors. On June 30, the commonwealth government formally requested the board for certification of the RSA as a “qualifying modification,” as defined under Title VI of the federal statute. Approval would be the first use of a restructuring under Title VI. The plan would see the issuance of three tranches of bonds to creditors. Haircuts would hover from 25 percent to 45 percent, depending on the tranche, and GDB assets, particularly the municipal loan portfolio and real estate assets, would pay for these new bonds. In general, the higher the exchange ratio between the value of the current claim and the value of the new bonds, the lower the coupon rate.

Tranches A and B will be secured by a first lien on the assets to be transferred from GDB to the Issuer with respect to principal payments and will be entitled to amortizing principal payments from available cash on an equal basis. Tranche C will be secured by a second lien on the assets with respect to principal payments and, unless an event of default occurs, will not be entitled to any principal payments until Tranches A and B bonds are paid in full. Interest will be paid semi-annually on an equal basis on all three tranches to the extent of available cash from collections. Interest will be paid “in kind” if cash on the related semiannual payment date is insufficient.

The board’s press statement says it has “conditionally” certified the RSA but, no details were provided on the conditions to which the agreement’s approval is dependent. To take effect, the deal will need to be approved by a two-thirds vote of bondholders, as long as those voting in favor hold at least half of the bank’s debt.

TRANSIT FUNDING PROPOSAL RELEASED

Many providers of municipal transportation services have looked with trepidation at the upcoming budget process for fiscal 2018. It has been feared that their efforts at developing and maintaining mass transportation projects could be under threat if the Trump administration has its way. Those fears were mitigated a bit when the House Appropriations Committee today released the fiscal year 2018 Transportation, Housing and Urban Development funding bill.

In total, the bill reflects an allocation of $56.5 billion in discretionary spending – $1.1 billion below fiscal year 2017 and $8.6 billion above the administration’s request. The bill includes $17.8 billion in discretionary appropriations for the Department of Transportation for fiscal year 2018. This is $646 million below the fiscal year 2017 enacted level and $1.5 billion above the President’s request. In total budgetary resources, including offsetting collections, the bill provides $76.7 billion to improve and maintain our nation’s transportation infrastructure.

The bill provides $11.75 billion in total budgetary resources for the Federal Transit Administration (FTA) – $662 million below the fiscal year 2017 enacted level and $526 million above the request. Transit formula grants total $9.7 billion – consistent with the authorization level – to help local communities build, maintain, and ensure the safety of their mass transit systems. Within this amount, $1.75 billion is included for Capital Investment Grants, and $1 billion for “Full Funding Grant Agreement” (FFGA) transit projects.

Core capacity projects receive $145 million in the bill, $182 million is included to fund all state and local “Small Starts” projects, and $400 million is included for new projects that provide both public transportation and inner-city passenger rail service. These programs provide competitive grant funding for major transit capital investments – including rapid rail, light rail, bus rapid transit, and commuter rail – that are planned and operated by local communities. Bill language limits the federal match for New Starts projects to 50 percent.

Most public transit providers will be disappointed, as the legislation eliminates National Infrastructure Investment grants (also known as TIGER grants), which were funded at $500 million in fiscal year 2017.

NEW JERSEY BUDGET GIMMICKS CONTINUE

This week we were asked what we thought of the plan to transfer the State’s lottery assets to the State’s pension funds as a way of addressing its huge unfunded liability. We take the view that while it does represent a new asset to the pension fund, it takes its place in a long line of one shot gimmicks that the State has employed to fund pensions over the last two decades. Whether it was the ill fated 1997 pension fund bonding scheme, the bogus agreement in the first Christie term to fund pensions from general revenues which the State failed to adhere to, or this plan all were designed to insulate taxpayers from the consequences of bad pension decisions.

While it is not our place to support one technique over another, it is clear that the State’s credit and ratings will not recover until action’s are taken to fund annually required contributions in full from current revenues. If that requires new revenues, so be it. We acknowledge the political difficulty of raising taxes but the reality is that decisions have consequences and the need for new revenue for pensions is the consequence at hand.

At the same time, policy decisions from the Christie administration in any number of budget areas do not help to improve the environment. In the midst of one of its greatest periods of ongoing crisis, NJ Transit has decided to apply funds meant for much needed capital investment to subsidize operations. This time the transfer for fiscal 2018 will be just over $500 billion. This is not new for the Christie administration. While over $7 billion of such transfers for NJ Transit operations have been made since 1990, an estimated $3.4 billion have been made by the Christie administration.

Viewed in total, it is no surprise that the greatest deterioration in the state’s finances and ratings have occurred in the Christie administration. Investors will be thankful for term limits.

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

______________________________________________________________________

PUERTO RICO

The bankruptcy judge hearing the proceedings in the Puerto Rico bankruptcy cases ordered that all papers opposing the motion to allow PREPA to assume the fuel supply contract with Freepoint Commodities, filed by the electric utility through the Financial Oversight & Management Board for Puerto Rico be filed by July 14 and reply papers to be filed by July 21. On April 10, the utility and Freepoint agreed to amend the contract, extending its termination from October 2017 to October 2018. As part of the agreement, PREPA had to immediately ask the court to authorize the contract if the utility commenced a bankruptcy process under Title III of the Promesa federal law.

According to PREPA, if Judge Swain failed to grant the authorization within 40 days of PREPA’s Title III case commencement, Freepoint could seek to terminate the contract or impose worse payment terms.

CYBERSECURITY BACK IN THE NEWS

We’ve raised the issue of cybersecurity as a potential source of credit weakness especially for services which rely on automation to run their operating and distribution systems. Examples in the municipal space are primarily essential service utilities like electric, water, and wastewater systems. So it is with interest that we note the latest efforts to hack into operating systems at facilities across the country.

Last week the New York Times reported that the FBI and the Department of Homeland Security have been scrambling to help multiple US energy firms and manufacturing plants fight off intrusions from hackers. The most serious incident involves the Wolf Creek nuclear power plant near Burlington, Kansas. The incident raises the profile of concerns of an attack that could not only cause widespread electric outages but potentially disable nuclear safety systems.

The “good” news is that it’s not clear how many of the hackers’ targets have been breached at all or is there any evidence that the attackers managed to access the targets’ actual control system networks. The hackers have targeted facilities from the Wolf Creek nuclear plant to an unnamed supplier of energy industry control systems. In 2014, the Department of Homeland Security warned that hackers had infected the networks of multiple US electric utilities with a piece of general purpose malware known as Black Energy.

Troubling is the initial reaction at the US Department of Energy to queries about hacking efforts against US electric generation and transmission assets. Last month, Secretary Perry would not discuss such efforts in any detail. Now he has reversed that position. Perry recently confirmed that hackers are targeting U.S. nuclear power plants, but he said federal labs can safeguard the nation’s sprawling grid. ” Obviously it’s real, it’s ongoing and we shouldn’t be surprised when you think of the world we live in today.” Perry pointed to “different groups, they may be state-sponsored, they may just be people who are criminal elements involved with trying to penetrate into certain areas.”

The secretary also touted “substantial resources” at the Department of Energy being used to thwart hackers, including the Idaho National Laboratory’s “full-out grid” effort to help detect and protect against attacks. The online assailants hijacked websites likely to be visited by electric utility employees in “watering hole” attacks. They also sent “phishing” emails aimed at luring workers into clicking on booby-trapped documents.

The grid has always been held up as the most likely target of a hack. Nuclear plant controls are designed especially to separate general corporate networks connected to the internet from those which actually control operating elements at those facilities. There is so far no evidence the intruders tried to move beyond corporate computers or cross into any of the isolated operational networks that keep the lights on and regulate the safety of radioactive material. Nonetheless, the issue of cybersecurity continues to grow as a potential source of credit risk and issuers need to do a better job of discussing the issue when they report results or seek to borrow.

MUNICIPAL UTILITY IN COLORADO

Boulder, CO has always been one of the states more progressive cities. So it is no surprise that in an age of increasing privatization, the City is trying to move toward municipal ownership of the City’s electric utility system. Since 2011, the City of Boulder has explored creating its own municipal electric utility (municipalization) as a path to achieving its goals of 100 percent clean energy and an 80 percent reduction in carbon emissions by 2050. During the last week of July and the first week of August, hearings will be held by the Colorado Public Utilities Commission on the City’s application to purchase the system.

The City is asking the Commission to approve the transfer of the assets Boulder wishes to acquire from PSCo so the City may move forward to condemnation; and Boulder’s plan for separating the electric distribution system that serves Boulder into two systems, one eventually owned and operated by Boulder’s new electric utility and one owned and operated by PSCo (the “Separation Plan”). Boulder’s request in Phase 1 also includes several orders that will ensure the Commission’s continued jurisdiction over the assets until PSCo no longer provides retail electric service within the City’s jurisdictional boundaries.

The plan calls for the City to begin operation of the municipal utility in 2022. Boulder’s request includes only the electric distribution facilities and real property interests necessary for the new electric utility to serve its customers located within the City Limits. there are two City-owned properties within the City Limits that the City is proposing that PSCo continue to serve: the facilities at Boulder Reservoir on the northern edge of the City Limits and the Open Space and Mountain Parks Department facilities located at Cherryvale Road and South Boulder Road on the southeastern edge of the City Limits. While Boulder would like to be able to provide electric service to all City-owned properties, the significant cost for the City to provide electric service to those two facilities is not cost effective at this time.

The application at this stage does not provide a price to be paid by the City for any assets transferred from PSCo should the plan move forward. Once that price is determined, the City will have the right to move forward with the plan or to maintain the status quo.

BAY AREA TOLLS MAY RISE

The tolls on the Golden Gate Bridge just rose by 25 cents. Now there is talk in the San Francisco Bay Area of a plan to raise tolls on all the Bay Area bridges by up to $3 as a way of dealing with increasing gridlock on roads and bridges. The Metropolitan Transportation Commission is looking to hike bridge tolls up to $3, a nearly 60-percent increase from current rates. The San Mateo County Transit District and Board of Supervisors are also studying locally-tailored options, such as another half-cent sales tax increase.

Nine counties are being asked to consider the proposed toll hike known as Regional Measure 3, or RM3. The Legislature is currently considering a bill that would enable the nine counties and MTC to float a future ballot initiative to increase tolls up to $3. A Bay Area Council study of 9,000 Bay Area voters found 85 percent said traffic was worse than a year ago and 56 percent would support gradually increasing bridge tolls by $3 over the next four years to help fund improvements.

Roughly three quarters, of 74 percent, said they’d be willing to pay more to cross the Bay Area’s seven state-owned bridges if that money is invested in “big regional projects” that ease traffic and improve mass transit. The Silicon Valley Leadership Group has also floated the prospect of a tri-county one-eighth-cent sales tax that would directly fund Caltrain.

Money from the increased tolls could be used on a wide range of projects, such as expanded ferry service, buying 300 more BART cars to allow the agency to run longer trains, increasing the number of freeway carpool and express lanes, increasing express bus services, extending BART to San Jose and other improvements.

Regional Measure 2, which voters approved in 2004, helped fund the fourth bore of the Caldecott Tunnel; BART’s extension to Warm Springs, Antioch and the Oakland airport connector; light rail in San Francisco; high-occupancy vehicle lanes on Interstate 580 and Interstate 80; improvements to Clipper cards and much more. That was the first time tolls had been raised since 1988, when voters approved Regional Measure 1.

The proposed measure is slated to go before voters in June or November next year. It needs a simple majority across the nine-county Bay Area to be approved.

ENERGY STATE TROUBLES CONTINUE

We have documented the troubles of the energy producing states to deal with the impact of lower oil and natural gas prices on their state revenue streams. That problem was manifest once again with the news that Fitch has lowered Oklahoma’s general obligation bond rating to ‘AA’ from ‘AA+’ . Fitch says that the action “incorporates a decline in financial resilience over the past several years as the state has struggled with the economic and revenue effects of the downturn in energy markets. The state has been unable to address its fiscal challenges with structural and recurring measures and revenue collections continue to reflect subdued energy prices. Although economic and energy production indicators improved in 2017 following an increase in rig counts, revenue growth prospects remain constrained by the extended low price environment and the state has reduced its rainy day fund (RDF; the constitutional reserve fund) to a level that provides limited cushion.

Oklahoma is fortunate that as a low debt issuer among the states its comparative debt metrics help to support a good rating. Nonetheless, the state has had difficulty budget  processes over recent years with balance achieved only through aggressive expense reduction. This has impacted primary services especially education throughout the State.

HARTFORD FINANCIAL TROUBLES DRAG RATING BELOW INVESTMENT GRADE

The ongoing financial deterioration of the City of Hartford have led S&P Global Ratings has lowered its rating on Hartford, Conn.’s general obligation (GO) bonds two notches to ‘BB’ from ‘BBB-‘ and its rating on the Hartford Stadium Authority’s lease revenue bonds to ‘BB-‘ from ‘BB+’. The ratings remain on CreditWatch with negative implications, where they were placed on May 15, 2017. “The downgrade to ‘BB’ reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering bankruptcy,” said S&P Global Ratings.S&P also noted that Hartford has engaged an outside law firm with expertise in financial restructuring. Officials also mentioned that the city would initiate discussions with bondholders for concessions to implement a debt restructuring if it didn’t receive the necessary support in the state’s 2019 biennial budget.

We note that the State’s budget remains unresolved. S&P pegged the odds of a downgrade at one-in-two with a “likelihood of a negative rating action, potentially by multiple notches. Factors that could lead to a downgrade would be if the state passage of a budget is significantly delayed, or if the city were not to receive sufficient support in a timely manner that would enable it to manage liquidity and allow it to meet obligations in a timely manner. Alternatively, if timely budget adoption translates into stabilized liquidity, and provides long-term structural support, we could remove the ratings from CreditWatch.

DON’T BOGART THOSE TAXES

Nevada saw the legal sale of recreational marijuana begin on July 1. Now as we go to press, Nevada’s governor has endorsed a statement of emergency declared for recreational marijuana regulations, after the state’s tax authority declared that many stores are running out of  product for sale. The Nevada Tax Commission is considering emergency regulations which would allow for liquor wholesalers to distribute marijuana. According to the Commission,  “Based on reports of adult-use marijuana sales already far exceeding the industry’s expectations at the state’s 47 licensed retail marijuana stores, and the reality that many stores are running out of inventory, the Department must address the lack of distributors immediately. Some establishments report the need for delivery within the next several days.”

Liquor wholesalers have undertaken litigation against the Commission which would allow them to participate in the business. Within the first weekend of legal recreational marijuana, sales totaled around $3 million, according to the Nevada Dispensary Association. The tax authority claimed most liquor wholesalers who have applied to distribute marijuana have yet to meet requirements to be licensed. The state is looking for a legal resolution soon in the Nevada Supreme Court. “The business owners in this industry have invested hundreds of millions of dollars to build facilities across the state. They have hired and trained thousands of additional employees to meet the demands of the market. Unless the issue with distributor licensing is resolved quickly, the inability to deliver product to retail stores will result in many of these people losing their jobs and will bring this nascent market to a grinding halt. A halt in this market will lead to a hole in the state’s school budget,” the department said in its statement.

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

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

______________________________________________________________________

BOARD OF EDUCATION OF THE CITY OF CHICAGO

$250,000,000

UNLIMITED TAX GENERAL OBLIGATION BONDS (DEDICATED REVENUES)

 

Moody’s: B3  S&P: B  Fitch: B+

 

Moody’s Investors Service has placed the B3 general obligation (GO) rating of the Chicago Board of Education, IL (CPS) under review for possible downgrade. The action applies to $5.4 billion of rated GO alternate revenue source bonds, and $159 million of GO lease revenue bonds an was prompted by the State of Illinois’ ongoing failure to provide timely operating aid to the district. Delayed categorical grant payments, which were due to CPS in fiscal 2017, total $466.5 million. The state’s timeframe for remitting those payments to the district remains uncertain. The action was taken before the General assembly enacted a budget for FY 2018 for the State. The district’s GO alternate revenue debt, which comprises the vast majority of the district’s outstanding GO debt, incorporates the district’s covered abatement alternate revenue debt structure, in which a levy is automatically extended for debt service if the district does not deposit the alternate revenue (mainly state aid) with the trustee in advance of debt service.

 

PENNSYLVANIA TURNPIKE COMMISSION

$721,015,000*

Turnpike Subordinate Revenue Bonds

 

Moody’s: A3

 

The Moody’s rating reflects “the Commission’s strong and well-established market position with a history of relatively inelastic demand in response to annual rate increases and a proven willingness to annually raise toll rates at above inflation levels for several years in order to ensure targeted financial metrics are met. The annual rate increases help support annually rising debt levels for both system capital investments and non-system needs under Act 44. The ratings also reflect the turnpike system’s essentiality as a key east-west transportation corridor in the eastern US with a very long operating history and well-managed financial operations with consistently strong senior lien debt service coverage ratios (DSCRs) and a satisfactory liquidity position. The ratings incorporate a degree of expected traffic and revenue (T&R) underperformance over the long-term, albeit not material given increasingly strong traffic and revenue growth over the last couple of years related to low gas prices and economic growth.”

 

THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY

$827,485,000

CONSOLIDATED BONDS

 Moody’s: Aa3

The Port Authority has been at the center of much controversy over a variety of projects in which it is involved. Whether it be traffic issues around the LaGuardia Airport reconstruction, issues regarding the location of and funding for a new Port Authority Bus Terminal, issues regarding the long term future of Kennedy Airport, and general governance issues stemming from efforts by the State of New Jersey to skew the benefits of the regional authority to projects in New Jersey. Fortunately, these issues have not been enough to overwhelm the Authority’s ratings on its flagship Consolidated Bond credit.

The Moody’s rating “benefits from the authority’s monopolistic control over critical transportation infrastructure assets in the economically diverse service area of NewYork/New Jersey including airport facilities and bridges and tunnels between New York City and New Jersey. The rating also reflects the authority’s track record of stable and solid financial performance with Moody’s senior debt service coverage (DSCR) around 2.1 times, Moody’s total DSCR around 1.9 times and debt to operating revenue close to 5.0 times on average from 2011 to 2016, good expenditure control and strong reserve levels.”

Moody’s explains that the rating could be higher but is influenced “by high execution risk associated with the authority’s large 10- year $32.2 billion 2017-2026 capital plan that was approved in February 2017. The capital plan is focused on financing revenue generating transportation assets rather than non-self-supporting development projects, which is positive. However, it includes capital projects of high complexity and substantial size which will require management resources and good control of project costs and risks. In addition, the funding for the capital plan will largely come from cash flow generation, existing liquidity reserves and bond debt financing, putting pressure on liquidity and debt levels in the next few years.”

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PREPA DOWNGRADE

Moody’s Investors Service has downgraded the rating for Puerto Rico Electric Power Authority’s (PREPA) approximately $8.0 billion in Power Revenue Bonds to Ca from Caa3. The outlook remains negative. According to Moody’s, the downgrade to Ca from Caa3 reflects PREPA’s decision on July 2nd to commence bankruptcy proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the July 3rd payment default on PREPA’s uninsured debt instruments, and the uncertainty regarding a future debt restructuring plan for PREPA, which has greatly increased and will impact the ultimate recoveries for bondholders.

The negative outlook reflects the likelihood that PREPA’s debt restructuring will be delayed given the number of entities filing for protection under PROMESA, which is likely to add more complexity to the process and that litigation, which has already been filed, will persist. Moody’s questions  the ability of PREPA to execute on a sorely needed long-term capital investment program focused on converting oil-based power generation to natural gas, particularly given the challenging economic environment within the Commonwealth.

The original RSA contemplated 85% recovery rates for bondholders. Moody’s estimates that  recoveries for creditors are more likely to fall in the 35-65% range.

ILLINOIS

The Illini probably hoped that the adoption of a balanced current budget for fiscal 2018 might take some of the pressure from the State’s ratings. In the case of Moody’s, that was not to be. In the midst of the contentious enactment and veto override process, Moody’s put the State’s Baa3 rating on review for downgrade.

We acknowledge that the deal struck was far from perfect and was only mildly bipartisan. Many of the assumptions included in the bill may not be realized but the result cannot be ignored. The budget adoption required hard political choices and overcame a well financed and highly personal effort by the Governor against the plan. The fact that the damage which could be done by a downgrade to below investment grade was acknowledged by the legislature has to be given some weight.

Frankly, we feel that the Moody’s review ignores the State’s political realities. Rarely has there been a governor so intransigent in terms of ideology and wealthy enough to personally undertake an extensive media campaign against such a necessary act of legislation. It will not be a surprise to see the relatively toxic political atmosphere in Illinois extend right on through the November 2018 elections.

One entity which could have hoped for downgrade relief was the City of Chicago. Given that it was reliant on legislative authority from the State to enact tax increases at the local level to partially address its substantial unfunded pension liabilities and that it finally received that authority, the Moody’s announcement of a negative outlook on the City’s rating had to be disappointing. That fact that it was largely based on the ongoing difficulties at the Chicago Public Schools adds to the City’s frustration.

All in all, it was a very unfulfilling week for these credits which probably deserved a little better.

CALIFORNIA

California total revenues of $16.63 billion for June fell short of projections in the governor’s revised budget released two months ago by 2.5 percent. The 2017-18 fiscal year began July 1.  For the fiscal year that ended June 30, total revenues of $121.91 billion missed May Revision estimates by $295.7 million, or 0.2 percent.  The fiscal year total was $2.68 billion lower than anticipated in the 2016-17 budget signed last summer, with all of the “big three” revenue sources missing the mark.

For June, personal income tax (PIT) receipts of $10.94 billion were $161.0 million shy of May estimates, or 1.5 percent.  For the fiscal year, PIT receipts of $82.72 billion were $1.05 billion lower than projections in the FY 2016-17 Budget Act, but lagged May estimates by just $196.3 million, or 0.2 percent.  June corporation tax receipts of $2.42 billion were $344.4 million lower than anticipated in the May Revision, or 12.5 percent.  The fiscal year total of $10.11 billion in corporation taxes was $885.6 million lower than FY 2016-17 Budget Act projections and $283.1 million less than expected in the May Revision.  Retail sales and use tax receipts of $2.32 billion for June were $57.2 million, or 2.5 percent, higher than May estimates.  For FY 2016-17, total sales tax receipts of $24.71 billion missed the original Budget Act projections by $1.03 billion; they topped May Revision assumptions by $126.7 million, or 0.5 percent.

California has not pursued external borrowing since FY 2014-15.  The state ended last fiscal year with unused borrowable resources of $36.98 billion, which was $3.99 billion more than predicted in the governor’s May Revision.  Outstanding loans of $4.84 billion were $1.64 billion lower than the Department of Finance’s May estimates.  This loan balance consists of borrowing from the state’s internal special funds.

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.