Category Archives: Bonds

Muni Credit News February 28, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

KANSAS BUDGET VETO

MICHIGAN HOLDS THE LINE ON TAXES

INFRASTRUCTURE FOCUS – DAMS

PHILADELPHIA SODA TAX

SCRANTON KEEPS LOCAL SERVICE TAX

MORE PA. DISTRESSED CITY NEWS

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KANSAS BUDGET VETO

After years of declining revenues and lowered credit ratings, it appeared that the Kansas legislature might enact a package of tax increases to address a $364 million budget gap for the current fiscal year. Since 2010, the state has faced a stagnant economy which has not responded to the tax cut stimulus. Most recently, S&P Global Ratings issued a “negative” outlook for its credit rating for Kansas. Last summer, S&P downgraded Kansas’ credit rating, to AA-.

The hope that the state might rely on more than spending cuts was not realized as eighty-five of the 125 representatives — one more than was necessary to override a veto — voted to enact the plan over Mr. Brownback’s objections. But, the Senate voted 24 to 16 and sustained Mr. Brownback’s veto, falling three votes short of the minimum for an override. The proposal called for increased income tax rates, as well as the elimination of a controversial tax exemption that benefited business owners. It would have raised more than $1 billion over two years

The tax exemption has been the cornerstone of Governor Sam Brownback’s plan to create jobs. Mr. Brownback said that the proposal before the Legislature would hurt job creators. So now the legislature is expected to embark on a course of continuing to try to raise revenues as reliance on cuts would likely require additional cuts to local school aid which have proved highly unpopular. It is thought that an extended period of resubmitted legislation and vetoes will go on until a final resolution.

In light of recent ratings actions in places like West Virginia, we wonder how long the rating agencies will take to recognize the dysfunctionality of Kansas’ budget process and to downgrade the state’s credit. As long as the Governor clings to his ideologically based approach to the state’s finances, we see the state’s credit as a declining situation.

MICHIGAN HOLDS THE LINE ON TAXES

The Michigan House of Representatives voted down legislation to roll back the state’s income tax with 52 votes for and 55 against. House Bill 4001 would continue to cut the tax rate to 4.15 percent in 2018 and 4.05 percent in 2019. If the state’s Budget Stabilization Fund — more commonly known as the “rainy day fund” — was over $1 billion by 2020, the rate would drop to 3.95 percent. If that were still true in 2021, it would drop to 3.9 percent. There is currently $734 million in that fund.

The House Fiscal Agency estimated the rollback to 3.9 percent would result in incremental revenue loss to the state, reaching a $1.1 billion budget hole by Fiscal Year 2022, when fully phased in. The Michigan individual income tax is now the largest source of State tax revenue, with net revenue of approximately $8.0 billion in fiscal year (FY) 2013-14, representing 39% of combined State General Fund and School Aid Fund revenue. In FY 2013-14, the individual income tax provided 62.7% of General Fund/General Purpose revenue and 20.5% of School Aid Fund revenue.

According to the Senate Fiscal Agency, (Public Act 94 of 2007) which increased the individual income tax rate from 3.9% to 4.35% as of October 1, 2007. (An expansion of the use tax to certain services also was approved; however, the use tax expansion was repealed two months later, on the day that it was to take effect, and replaced with a Michigan Business Tax surcharge.)

The income tax rate was to remain at 4.35% for four years, then decline over six years back to 3.9%. Instead of the reduction from 4.35% to 3.9% over five years, Public Act 38 of 2011 made a single reduction from 4.35% to 4.25% as of January 1, 2013, although Public Act 223 of 2012 subsequently accelerated the rate reduction by three months, to October 1, 2012. the current tax rate of 4.25% is lower than the rate levied during most of the history of the individual income tax, including the 25 years between 1975 and 2000. Over the 48-year life of the individual income tax, the median average tax rate levied was 4.4%.

INFRASTRUCTURE FOCUS – DAMS

Infrastructure issues will be addressed in President Trump’s joint speech to Congress this week as well as in the budget. That will help to bring focus to an issue crying out for it. In 2016, the Association of State Dam Safety Officials estimated that it would cost $60 billion to rehabilitate all the dams that needed to be brought up to safe condition, with nearly $20 billion of that sum going toward repair of dams with a high potential for hazard. By 2020, 70 percent of the dams in the United States will be more than 50 years old, according to the American Society of Civil Engineers. In 2015, Representative Sean Patrick Maloney, Democrat of New York, introduced the Dam Rehabilitation and Repair Act, an amendment to the National Dam Safety Program Act, minimum safety standards. The bill is still pending, but it would not apply to a majority of the dams in the United States because more than half of them (69%) are privately owned.

There are 90,000 dams across the country, and more than 8,000 are classified as major dams by height or storage capacity, according to guidelines established by the United States Geological Survey. The average age of the dams in the U.S. is 52 years old. Other than 2,600 dams regulated by the Federal Energy Regulatory Commission, the rely on state dam safety programs for inspection.

Budgets for dam safety at the state level however, are not significant. They range from a high of $11.1 million in California to $0 in Alabama. State dam safety programs have primary responsibility and permitting, inspection, and enforcement authority for 80% of the nation’s dams. Therefore, state dam safety programs bear a large responsibility for public safety, but unfortunately, many state programs lack sufficient resources, and in some cases enough regulatory authority, to be effective. In fact, the average number of dams per state safety inspector totals 207. In South Carolina, just one and a half dam safety inspectors are responsible for the 2,380 dams that are spread throughout the state. Alabama remains the only state without a dam safety regulatory program.

So the problem will clearly require investment at both a state and federal level. It highlights the need to focus the discussion of infrastructure on maintenance of the existing infrastructure let alone its expansion. As for how much may be needed, $1 trillion may sound like a huge amount. But in the context of overall infrastructure needs, assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA). That is just for drinking water distribution. No dams, highways, roads, ports, or wastewater upgrades.

PHILADELPHIA SODA TAX

Is it the real thing? So far there is one month available on the tax on sugary drinks implemented as of January 1 in Philadelphia. The city is the first to put such a tax into effect. The tax is levied at a rate of 1.5 cents per ounce raising the wholesale price of the typical 2 liter bottle by about 50 cents. In January, the city collected $5.7 million some $91 million. That would require the city to collect the tax at a monthly rate of some $7.7 million.

The collections exceeded expectations even though the drop in sales by volume was well in excess of estimates. Supermarkets and distributors have claimed declines from 30 to 50%. The tax continues to be challenged in the courts. Three dozen state legislators filed a brief calling for the Commonwealth Court to overturn it. They contend that the tax is not constitutional, violates the law, and will result in lost sales tax revenue collection into the commonwealth’s general fund.

Opponents contend that successful implementation would spawn other efforts in Pennsylvania cities to tax sugar based products. They claim that other cash-strapped cities such as Harrisburg, Chester, and Williamsport will use the appellant’s tax as a way to increase their revenues. “It is not unrealistic to expect that next year there will be a ‘candy tax’ based upon volume in Philadelphia, a sweetened beverage tax based upon volume in Harrisburg, and a ‘snack/cookie tax’ based upon volume in another cash-strapped city.”

A city spokesman said the city’s “economist demonstrated that the PhillyBevTax would have little impact on state sales tax revenue and under certain circumstances could actually increase state sales tax revenue.” Boulder, CO voters approved a 2 cent per ounce tax last fall and voters approved “soda taxes” in the California cities of San Francisco, Oakland, and Albany.

SCRANTON KEEPS LOCAL SERVICE TAX

In the summer of 2016, the MCN discussed the efforts of local libertarian community activist Gary St. Fleur to legally challenge the collection of a local services tax by the City of Scranton, PA. Rejecting residents’ claims that Scranton violates a tax cap, visiting Senior Judge John Braxton of Philadelphia approved Scranton’s petition to levy the higher local services tax of $156 on anyone who works in the city and earns above $15,000.

Braxton approved Scranton’s tripled LST petitions for each of 2015 and 2016, up from the prior typical LST of $52 a year, as planks of the city’s Act 47 recovery plan. Neither of those petitions generated opposition. This time, however, eight residents formally opposed the city’s LST petition for 2017. They and their attorney, John McGovern, contended the city routinely goes way over a total cap on a group of taxes allowed under state Act 511, which includes the local services tax.

In a hearing on Feb. 13, city officials testified that while Act 511 allows the usual $52 levy the $104 LST increase. Braxton agreed with the city and rejected the residents’ claims. This means that eligible workers will continue to pay an LST of $3 week, or $156 this year, instead of $1 a week, or $52. The LST applies to about 32,000 people who work in Scranton.

Special counsel for the city, Kevin Conaboy, argued that the residents’ opposition was misplaced because they should have fought the tax on different grounds, called a mandamus action. Braxton agreed. He dismissed the opposition to the LST “without prejudice,” meaning the residents could pursue another avenue of attack. “Nothing in this order shall prevent respondents from objecting to the imposition of this tax at the appropriate time and through the proper procedural mechanisms,” the judge said in his one-page order.

So the issue may not be dead but for now Scranton can adopt a budget including those revenues as it continues its efforts to restore the city’s finances.

MORE PA. DISTRESSED CITY NEWS

Just to the south of Scranton, the City of Wilkes-Barre struggles with debt, budget, and infrastructure issues. Their project may not be large, bright, and shiny but it is of great importance to the city. The Solomon Creek wall repair would restore a flood control structure dating back to the 1930’s. Absent help from the state or federal governments, the city has pushed for a $5.5 million bond to pay for the repairs. As the transaction has been considered, the issue of whether or not to tie the project financing to a larger debt refinancing has been under consideration.

The restructuring would restructuring reduce upcoming annual long-term debt payments to make them more affordable in order to avoid possible distressed status and strict state oversight of spending under Act 47. The plan before the council was presented by the city’s consultant, PFM Financial Advisors LLC, of Harrisburg, and calls for lower payments this year and next. But the difference in payments is scooped up and tossed further along, leaving the city to pay higher amounts down the road. The city would refinance $3.9 million of its $86.2 million debt and issue $5.5 million in new money through a bond for the repairs. The debt payment would drop to $5.1 million from $5.4 million this year. Next year it would fall to $4.9 million from $7.6 million. But in 2019 and 2020, the payments climb to more than $8 million, decreasing to $1.7 million in 2036.

Final consideration of the plan has been postponed until March. This will provide more time for the city to consider alternatives including asset sales and renewed efforts to negotiate expense reductions associated with the city’s workforce.

P3 FOR PRIVATE COLLEGE DORMITORIES

Howard University is one of the leading historically black colleges and universities (HBCU) in the US. In spite of that status it faces many financial challenges as it attempts to remain competitive in a highly fluid environment. One of the challenges many schools face is in the renovation and expansion of on campus residential facilities. Howard has chosen a different course than the traditional tax exempt bond financed revenue bond model.

Howard Dormitory Holdings 1, LLC, a wholly-owned and title-holding company of Howard University (“Howard SPE”), Howard University (the “University”) and Corvias, a Rhode Island-based company, announced a 40-year partnership that will completely renovate and maintain two of the University’s largest residence halls and manage two additional halls. Corvias will renovate the East and West Towers of Howard’s Plaza Towers residence, located at 2251 Sherman Ave., N.W. and manage the University’s Drew and Cook residence halls, which are located on the north side of the main campus. The Howard Plaza Towers, and Drew and Cook residence halls were transferred by the University to the Howard SPE.

Corvias raised $144 million for the project from institutional investors. Proceeds will fund renovation and modernization, the retirement of some debt, transactions costs and the creation of a sizable reserve fund for future capital expenses. Corvias will manage the renovation and operations of the facilities on a day-to-day basis for a performance-based management fee, but all residual cash flow will flow to the University Parties. A portion of these funds will be dedicated to a reserve fund for reinvestment into the residence halls and a portion will be collected by the University Parties to fund other discretionary initiatives.

Disclaimer: The opinions expressed are 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.

Muni Credit News February 23, 2017

Joseph Krist

Municipal Credit Consultant

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THE HEADLINES…

TEXAS BUDGET

INDIANA TOLLING LEGISLATION

AND WHILE WE ARGUE ABOUT INFRASTRUCTURE FUNDING

CALIFORNIA PROJECT CAUGHT IN THE CROSSHAIRS

LOCAL JAILS COULD BENEFIT FROM IMMIGRATION CRACKDOWN

LEX CLAIMS CASE GETS MORE COMPLEX

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TEXAS BUDGET

The Governor’s Budget for the 2018-2019 biennium implements many of the 4 percent cuts suggested by state agencies and further reduces agency expenditures, except public school funding formulas and certain other priorities, by an additional 2 percent. It purports to do so without issuing new debt, raising taxes or utilizing the Economic Stabilization Fund. The Governor’s Budget calls for a business tax reduction, property tax reforms and maintaining funding for roads. This budget also calls for a constitutional amendment that would permanently limit the state’s spending growth to the rate of growth in population and inflation. This despite the fact that the legislature passed a budget for the current biennium that limited growth in state fund expenditures within this population and inflation benchmark.

It proposes to continue down the path to franchise tax elimination by cutting the rate to achieve another $250 million in savings for Texas employers. Other policy initiatives would adopt real revenue caps that prevent local governments from endlessly raising taxes without voter approval. Second, it calls for meaningful limits on the overlay of special purpose districts.

On the revenue side, The Governor’s Budget utilizes a four-year look back of historical population and inflation data. This methodology creates a 5.81 percent allowable growth rate, which is significantly below the lowest personal income growth estimate provided to the Legislative Budget Board (LBB) (9.9 percent) and well below the number adopted by the LBB (8 percent).

The budget does reference the local pension difficulties plaguing the State’s major cities but makes clear that, in the Governor’s view, there is no affirmative role for the State in resolving them. This budget calls for a constitutional prohibition on using state funds to bailout local pensions. A recent Attorney General Opinion has made clear that the state has no legal obligation to finance floundering plans. At the same time, the Governor’s comments on pensions are somewhat conflicting.

He expresses the view that the state government should get out of the business of micromanaging local pension decisions while unequivocally making clear that statewide taxpayers will not be on the hook to bailout local pensions. The entities that are financially responsible to their employees, retirees and taxpayers should work with municipal leaders, pensioners and stakeholders to develop solutions — are still dependent upon state action to implement meaningful changes.

In terms of how the biennial budget deals with the uncertainties of ACA repeal and replacement, it relies on block grants. In the Governor’s view, Block grants should be used for the administration of state-managed Medicaid programs, and Congress should act to authorize this important reform. The block grants should be designed in a way that protects states from cost growth due to population growth or the economy and should be accompanied by reforms that significantly reduce or eliminate federal requirements. The reformed Texas Medicaid program would include personal responsibility requirements for certain populations. This the approach favored by the most ideological conservatives.

One small in dollars but large in policy aspect of Gov. Abbot’s budget has already been challenged in the courts. A federal judge issued a preliminary injunction against a Texas plan to cut off funding for Planned Parenthood from the state’s Medicaid program. It is only some $4 million in question but it would complete efforts to eliminate PP from participation in Texas’ Medicaid program. State health officials let it be known in December that Planned Parenthood would no longer receive funding from the program. The group had 30 days before the change took effect unless it filed an appeal.

The preliminary injunction preserves what Planned Parenthood contends are funds to provide cancer screenings, birth control access and other health services for nearly 11,000 low-income women. Similar defunding efforts have also been blocked in Arkansas, Alabama, Kansas, Mississippi and Louisiana. All of these efforts simply create greater uncertainty about the viability of proposed budgets and, for the weaker credits, expose them to more downside risk.

INDIANA LOOKING AT INCREASED USE OF TOLLS FOR ROADS

House Bill 1002 passed the state’s lower legislative chamber. Among a variety of increases in fuel and motor vehicle taxes and fees, it also Repeals restrictions on when a tolling project can be undertaken. The bill also includes a provision which Requires the Indiana department of transportation (INDOT) to seek a Federal Highway Administration waiver to toll interstate highways. It also limits the first toll lanes under the waiver to certain interstate highways and provides for a public comment period and requires replies to the public comments for a toll road project by INDOT or a tollway project carried out using a public private partnership.

The bill, by requiring an outside consulting firm to perform a tolling feasibility study, could increase INDOT expenditures in FY 2017. The state of Wisconsin recently published a tolling feasibility study (December 2016) that was performed by a third-party vendor. The reported costs for this study were$700,000. INDOT reports the cost of a tolling feasibility study could be between $200,000 and $500,000. Increases in INDOT expenditures for a tolling feasibility study would come from the State Highway Fund.

AND WHILE WE ARGUE ABOUT INFRASTRUCTURE FUNDING…

# of bridges # deficient % deficient

Iowa	24,184	4,968	20.5%
Pennsylvania	22,791	4,506	19.8%
Oklahoma	23,053	3,460	15.0%
Missouri	24,468	3,195	13.1%
Nebraska	15,334	2,361	15.4%
Illinois	26,704	2,243	8.4%
Kansas	25,013	2,151	8.6%
Mississippi	17,068	2,098	12.3%
Ohio	28,284	1,942	6.9%
New York	17,462	1,928	11.0%

The table depicts the ten states with the largest number of structurally deficient bridges in the U.S. as reported by the American Road and Transportation Builders Association. Historically, Pennsylvania had been the dubious annual leader in this category but in the last two years has been overtaken by Iowa.

There are some common threads which run through this list. Pennsylvania, Illinois, and Kansas have all been known for their respectively dysfunctional budgeting processes. They have each let transportation funding lag with Kansas transferring money from highway funds to cover general fund shortfalls resulting from unrelated tax cuts. Each state on the list has a substantial rural component to their transportation system which leads to a larger number of smaller yet important bridges often which are the responsibility of entities below the state level. This has complicated funding for upkeep and replacement.

From our standpoint, it reinforces our view of the importance of infrastructure maintenance as Congress debates not only funding but project priority. Maintenance clashes with the well-known administration preference for new, big, and shiny projects. The empirical evidence would seem to lean in favor of restoration over new construction, especially in rural areas where commercial activities rely on a strong local transportation system to facilitate the movement of goods to market.

CALIFORNIA PROJECT CAUGHT IN THE CROSSHAIRS

Many infrastructure proponents are looking to see whether Transportation Secretary Elaine Chao reconsiders her decision as to whether or not to allow federal funding at this time for a project in northern California. Caltrain formally petitioned the administration to reverse course on its recent decision to halt $647 million worth of grant money for the transit agency until the start of the federal fiscal year in October. Caltrain commuter rail that runs between San Francisco and San Jose. The rub is that the project would also eventually benefit the state’s high-speed rail project.

The electrification project is scheduled to begin on March 1. It is probably the best example of “shovel ready” around. The existing commuter rail line has experienced significant ridership increases and few doubt the need to increase capacity on that line. The work would most likely be needed regardless of its ability to facilitate the high speed rail project.

Based on that reality, the decision not to fund at this time is seen as politically motivated. Regardless of the ultimate outcome, it illustrates the difficulty in managing the politics and execution of any large scale infrastructure plan. Just in the case of rail expansion, major projects requiring significant funding are awaiting execution and funding decisions in Democratic strongholds including RTA updates in Chicago, a new trans-Hudson rail tunnel between New York and New Jersey and, the MBTA in Boston to name a few. Should political considerations become a prime funding consideration all of these projects could be at risk. In Chicago and Boston, negative decisions would be seen as having potentially negative impacts on the underlying credits sponsoring those projects.

LOCAL JAILS COULD BENEFIT FROM IMMIGRATION CRACKDOWN

The plans announced this week to ramp up efforts by the Trump administration to deport larger numbers of undocumented aliens may have resulted in an unintended benefit for investors in high yield local detention facility bonds. The sector had been under pressure as the result of announcement by the DOJ under the Obama administration to significantly curtail the use of these facilities for a variety of reasons. There was also concern that policies that deemphasized deportations would reduce demand for cells by the Immigration, Customs, and Enforcement Service which used these facilities to hold potential deportees while they awaited final adjudication of their cases.

Under the plans announced this week, a much higher level of apprehension and detention of the undocumented would result. This would create a much higher level of demand for cells, thereby reducing the short-term financial risk associated with these projects. This change in policy should create – at least as long as it remains in effect – an opportunity for investors in this sector.

The whole turn of events does highlight the long term political risk of investment in this class of bonds. It renders individual project economics less relevant to investors. It also shows how quickly the outlook for these credits to change. We are always less comfortable when the foundation for a credit is not fundamental economic viability so we still believe that it is a class of bonds that individual investors should curb their enthusiasm for.

WEST VIRGINIA DOWNGRADE

In our last issue, we outlined the Governor’s proposal for a fiscal year 2018 budget. Before the budget process was allowed to play out, Moody’s announced that it has downgraded the State of West Virginia’s general obligation debt to Aa2 from Aa1, affecting approximately $393.6 million in debt outstanding. The state’s lease appropriation and moral obligation debt has been downgraded one notch to Aa3 and A1, reflecting the ties to the general obligation rating.

Moody’s said that “the downgrade of the general obligation and related lease ratings expenditures and available resources, which is generally inconsistent with a Aa1 rating. While the state has used a mixture of revenue enhancements, expenditure reductions and reserves to close budget gaps, revenues continue to lag budgeted estimates and the structural imbalance is likely to continue at least through 2018. Additionally, while the economy has begun to stabilize some, the demographic profile remains weak. Pension liabilities remain above average and the state’s debt burden could increase under the Governor’s new infrastructure proposal.”

At the same time, Moody’s expressed its view that the economy is stabilizing and liquidity remains healthy, allowing the state financial flexibility to weather a slower rebound. Additionally, it expects the state to continue with what it called its prudent management practices, managing through what will likely be a longer term but more moderate revenue decline.

LEX CLAIMS CASE GETS MORE COMPLEX

We recently discussed ongoing litigation over the rights of general obligation versus those of COFINA bondholders to revenues legislatively dedicated to outstanding COFINA debt. Since then there have been new developments. The COFINA Senior Bondholders, the Puerto Rico Funds, and the Major COFINA Bondholders, all own COFINA bonds in differing amounts. If no federal statute grants an unconditional right to intervene, the Court is nonetheless required to grant a party’s motion to intervene if that party has “demonstrate[d] that: (1) its motion is timely; (2) it has an interest relating to the property or transaction that forms the foundation of the ongoing action; (3) the disposition of the action threatens to impair or impede its ability to protect this interest; and (4) no existing party adequately represents its interest”.

The Puerto Rico Funds and the Major COFINA Bondholders’ made respective motions to intervene which raise similar arguments as to why each should be permitted to intervene as of right. Specifically, both the Puerto Rico Funds and the Major COFINA Bondholders argued that they have an interest in the revenues that back the COFINA bonds which they hold. The Puerto Rico Funds and the Major COFINA Bondholders asserted that no existing party to this action can adequately represent their respective interests.

The COFINA Senior Bondholders’ motion to intervene was denied in light of the Court’s conclusion that the PROMESA counts are not stayed. The Court is satisfied that the Puerto Rico Funds and the Major COFINA Bondholders have met their modest burden of showing that there is a possibility that no named defendant may adequately represent their interests. That rests on the somewhat technical issue that BNYM Trustee — the named defendant the GO Bondholders allege adequately represents the interests of the Puerto Rico Funds and the Major COFINA Bondholders—has moved to dismiss the second amended complaint in this case on grounds that could result in BNYM Trustee being dismissed as a defendant. Should BNYM Trustee prevail on its motion to dismiss, no COFINA Bondholder representative would remain as a litigant in this case unless the Court permits intervention.

The Court denied the Commonwealth Defendants’ motion to stay, and the COFINA Senior Bondholders motion to intervene . The Court granted the motions to intervene of the Oversight Board, Ambac, the Puerto Rico Funds, and the Major COFINA Bondholders. So it would seem that opposing interests have been aligned with each other making for a much more difficult process of speculating as to how this is all going to turn out. We are comfortable with saying that a final resolution is a long way off and that we are glad to be in the position of spectator rather than speculator with anything at risk.

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.

Muni Credit News February 21, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

WEST VIRGINIA BUDGET

ATLANTIC CITY SETTLES BORGATA TAX APPEAL

PUERTO RICO GO SUIT ADVANCES

HOUSE VERSION OF ACA REFORM EMERGES

PORTS IN A TRADE WAR

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WEST VIRGINIA BUDGET

Classroom teachers would receive a 2-percent pay raise, highway projects including Interstate 70 in Ohio County would be finished, and motorists would pay 10 cents more per gallon of gasoline if Gov. Jim Justice’s proposed budget is enacted by the West Virginia Legislature.

The Governor calls his proposal West Virginia’s “Save Our State Budget”. The plan combines spending cuts, tax increases and fee increases and a $123 million withdrawal from the state’s Rainy Day Fund to fund an estimated $500 million shortfall for fiscal year 2018. Justice’s relies on $450.15 million raised through a half-percent increase in the sales tax to 6.5 percent; eliminating tax exemptions for professional services and advertising and raising the gasoline excise tax by 10 cents a gallon from the current 20.5 cents to 30.5 cents. The proposed general fund budget would increase to about $4.8 billion, with total spending, including federal and other funds, at $12.9 billion.

During his State of the State speech, Justice dramatically advocated for the proposed tax increases. “I truly, from the bottom of my heart, hate tax increases,” he said, adding it’s “the most painless way I think you can get out of this mess. If you don’t do this, you’re dead. You’re dead beyond belief.” All of the proposed tax increases wouldn’t be permanent. After three years, he proposes eliminating the sales tax as well as a proposed 0.2-percent commercial activities tax he wants businesses to pay. Justice’s proposal emphasizes a “bold and aggressive” $1.4 billion road program that shows Justice’s commitment to long-term economic growth according to state budget officials. In addition, Justice proposes a $105 million Save Our State Fund, to be used for economic development and infrastructure investment.

The roads program “will invest heavily in roads and bridges,” and is expected to create up to 25,000 new jobs throughout the state, including temporary jobs, according to the administration. Among the projects listed in the $1.4 billion Phase I of the program — the phase that lists projects that have passed most requirements and are ready to go — is the $135 million I-70 bridge rehabilitation and replacement project in Ohio County. The $1.5 billion Phase II includes W.Va. 2 widening projects in Hancock, Marshall and Wetzel counties. Those include a $10.5 million Hancock County project that widens it through New Cumberland; an $80 million project in Wetzel County from Proctor to Kent; and creates four lanes through Marshall County.

Justice called his plan for $26.6 million in cuts as “responsible cuts,” stating alternatives could cost the state 3,000 jobs, in addition to cuts that could have eliminated all state parks and shut down dog and horse tracks, and veterans’ services. The planned cuts include eliminating the eight, regional education service agencies (RSEA) that provide services to public schools and cost the state more than $3.5 million per year. The services RESAs provide include training bus drivers, and hiring special needs teachers, and managing substitute teacher schedules.

ATLANTIC CITY SETTLES BORGATA TAX APPEAL

The City of Atlantic City has settled a long standing major tax-appeal debt owed to the Borgata Hotel, Casino & Spa. The state says the city agreed to accept less than half of the $165 million owed it. The settlement was reached by overseers appointed by Gov. Christie under a law that placed control of Atlantic City under the oversight of the state Department of Community Affairs. The announcement came from the state, which headlined its release, “Christie Administration and Borgata Reach Settlement Agreement.”

The state said Borgata agreed to accept $72 million to cover all judgments and claims for 2009 to 2015. The settlement precludes Borgata from pursuing tax appeals for 2013 to 2015. Borgata also agreed to make payments under the Payment in Lieu of Taxes program that applies to the city’s casinos beginning this year, the statement said. Previous efforts overseen by state monitors, an Atlantic County Superior Court judge, and the city itself had failed to resolve the debt.

The latest negotiations were conducted with the involvement of the state’s new overseer. Christie had made settlement of the Borgata deal a priority of past emergency managers appointed by the state, but blamed the city for the lack of a settlement before now. “This settlement has been one of my administration’s priorities since Atlantic City’s fiscal crisis forced us to assume control of operations there in November,” Christie said in a statement. “The city administration, despite all the time and opportunity given to them, failed to accomplish the goal, as they have with so many others.” Christie noted that the $72 million was $30 million less than what the city had proposed in its own five-year recovery plan, which was rejected by the state.

Changes in the ownership of the Borgata may have been as much of a factor in the settlement as anything else. Borgata is run by MGM Resorts International, which took sole control of the property from its partner Boyd Gaming last August. MGM paid up for full control — $900 million for half of the property — even as the judgment from the tax appeals had reduced Borgata’s total assessed value to about $800 million. MGM is seen as wanting to pursue further development in Atlantic City or North Jersey.

It is not clear how the city would finance the $72 million. Other tax settlements with casinos were funded through bond payments. The city had proposed selling its municipal airstrip, Bader Field, to its Municipal Water Authority to help pay off debts, but that plan was rejected by the state.

PUERTO RICO GO SUIT ADVANCES

A U.S. District Court Judge denied the commonwealth’s motion to stay a lawsuit filed by general obligation (GO) bondholders and a motion to intervene presented by senior Sales Tax Financing Corp. (Cofina) bondholders. Motions were granted allowing intervention by the Financial Oversight and Management Board; Ambac Assurance Corp., which insures $800 million in Cofina funds; the Puerto Rico Funds and by major Cofina bondholders.

The judge said that “this is not an action to recover a liability claim against the government of Puerto Rico that arose before the enactment of Promesa because the GO Bondholders seek only declaratory and injunctive relief.” The ruling was made as part of the Lex Claims case, a lawsuit filed by GO bondholders against the island’s governor, Treasury secretary and director of the Office of Management Budget, as well as the Bank of New York Mellon Corp. That suit was amended to include Cofina and its executive director.

The GO bondholders are hoping to stop the government from diverting the sales and use tax to pay Cofina bondholders. The GO creditors say their bonds are guaranteed by the commonwealth’s full faith and credit and taxing power and have payment priority over Cofina. This would be based on their belief that the constitutional clawback that supports GO debt supersedes legislative dedication of sales tax revenues to the COFINA debt.

The judge ruled on six motions: (1) the Commonwealth and Cofina defendants’ motion to stay the action in its entirety pursuant to section 405 of Promesa; (2) the fiscal oversight board’s motion to intervene pursuant to Promesa; (3) Ambac Assurance’s motion to intervene as a defendant pursuant and to stay the action pursuant to Promesa; (4) the Cofina senior bondholders motion to intervene; the Puerto Rico-based funds’ motion to intervene; and (6) the major Cofina bondholders’ motion to intervene.

The GO bondholders’ complaint challenged the government’s moratorium order that diverted funds to pay services, the commonwealth’s failure to allocate funds for future GO obligations, and legislation diverting funds to the Government Development Bank. The complaint alleges the commonwealth and Cofina defendants have deprived them “of rights, privileges, and immunities secured by the laws of the United States.”

The judge’s decision to allow the fiscal board, Ambac, Puerto Rico Funds and major Cofina bondholders to intervene because “the Court is required to grant a party’s motion to intervene if that party has demonstrated that: (1) its motion is timely; (2) it has an interest relating to the property or transaction that forms the foundation of the ongoing action; (3) the disposition of the action threatens to impair or impede its ability to protect this interest; and that (4) no existing party adequately represents its interest.”

HOUSE VERSION OF ACA REFORM EMERGES

House Republican leaders presented their rank-and-file members with the outlines of their plan to replace the Affordable Care Act, leaning heavily on tax credits to finance individual insurance purchases and sharply reducing federal payments to the 31 states that have expanded Medicaid eligibility. The talking points they provided did not say how the legislation would be paid for, essentially laying out the benefits without the more controversial costs. It also included no estimates of the number of people who would gain or lose insurance under the plan, nor did it include comparisons with the Affordable Care Act, which has extended coverage to 20 million people.

It purports to lower costs, expands access, improves quality, and puts patients and families in charge of their care, while protecting patients with pre-existing conditions and ensuring dependents up to age 26 can stay on their parents’ insurance. To lower the cost of healthcare, Republicans would eliminate all the Obamacare tax increases, including: The tax on health insurance premiums; The medicine cabinet tax; The tax on prescription drugs; The tax on medical devices; the increased expense threshold for deducting medical expenses. It would provide additional assistance for younger Americans and reduce the over-subsidization older Americans are receiving.

The legislation creates a new code section – 36C— to do this. The credit is: Under current law, in 2017, the maximum amount that can be contributed (both employer and individual contributions) to an HSA is $3,400 for self and $6,750 for a family. H.R. 1270 (114th Congress) and A Better Way significantly increase the contribution limits by allowing contributions to an HSA to equal the maximum out of pocket amounts allowed by law. For 2017, those amounts are $6,550 for self-only coverage and $13,100 for family coverage.

H.R. 1270 and A Better Way provide that if both spouses of a married couple are eligible for catch-up contributions and either has family coverage, the annual contribution limit that can be divided between them includes both catch-up contribution amounts. Thus, for example, they can agree that their combined catch-up contribution amount is allocated to one spouse to be contributed to that spouse’s HSA. In other cases, as under present law, a spouse’s catch-up contribution amount is not eligible for division between the spouses; the catch-up contribution must be made to the HSA of that spouse.

H.R. 1270 and A Better Way provide that, if an HSA is established during the 60-day period beginning on the date that an individual’s coverage under a high deductible health plan begins, then the HSA is treated as having been established on the date that such coverage begins for purposes of determining if an expense incurred is a qualified medical expense. Thus, if a taxpayer establishes an HSA within 60 days of the date that the taxpayer’s coverage under a high deductible health plan begins, any distribution from an HSA used as a payment for a medical expense incurred during that 60-day period after the high deductible health plan coverage began is excludible from gross income as a payment used for a qualified medical expense even though the expense was incurred before the date that the HSA was established.

Here is the bad news for state credits and for hospitals. Obamacare’s Medicaid expansion for able-bodied adults enrollees would be repealed in its current form. States that chose to expand their Medicaid programs under Obamacare could continue to receive enhanced federal payments for currently enrolled beneficiaries for a limited period of time. However, after a date certain, if states choose to keep their Medicaid programs open to new enrollees in the expansion population, states would be reimbursed at their traditional match rates for these beneficiaries.

States would also have the choice to receive federal Medicaid funding in the form of a block grant or global waiver. Block grant funding would be determined using a base year and would assume that states transition individuals currently enrolled in the Medicaid expansion out of the expansion population into other coverage. States would have flexibility in how Medicaid funds are spent, but would be required to provide required services to the most vulnerable elderly and disabled individuals who are mandatory populations under current law. Block grants are intended to provide less money. The rest of the discussion about flexibility etc. is just cover for lower funding.

The plan relies on “high risk pools”. Before Obamacare, 34 states had high risk pools. Building on the idea of high risk pools, A Better Way envisions new and innovative State Innovation Grants. But instead of being tied to a separate pooling mechanism, these resources would give states sole flexibility to help lower the cost of care for some of their most vulnerable patients. Some may suggest State Innovation Grants would lead to enrollment caps or waiting lists – like certain high risk pools functioned prior to Obamacare. There is a reason they were eliminated under the ACA as well as its progenitor in Massachusetts under then Gov. Mitt Romney.

What is most notable about this set of talking points is an almost complete absence of any discussion of how the federal government would pay for this. Like many of Paul Ryan’s efforts over the years, the plan seems to be detailed and thought out but in reality is full of platitudes and short on operational substance. This is what should be of concern to state governments, consumers, providers, and investors.

PORTS IN A TRADE WAR

Recently we were interviewed by the Daily Bond Buyer on the issue of the potential impact of a trade war on municipal credits. The primary items of concern were the major West Coast ports and municipalities on the border with Mexico. The issue comes up as the result of comments made over the course of the campaign and since by President Trump. Here is what we said.

We said that we view a potential trade war with China as more of an economic event than a credit event, but acknowledged that the impact on West Coast ports could be notable. I mentioned the Alameda Corridor Transportation Authority, which operates a bond-financed rail line from the ports of Long Beach and Los Angeles 20 miles north to downtown Los Angeles, carrying containers from dockside to the yards of the freight railroads that send them onwards.

“Obviously they have grown and benefited from trade with China as you go up and down the West Coast,” we said of the ports. “There would be kind of the obvious ramifications for those ports, in terms of lower volumes and lower revenues.” Its revenues are volume-dependent as are some small tax-allocated land deals for warehouse facilities that could be vulnerable to an extended trade slowdown.

We mentioned that “Seattle and Oakland both benefit from the mitigating factor that they also include airports that account for major chunks of their revenue. This somewhat insulates them from the risks associated with a decline in container volume.”

The border cities would be impacted by the impact on property values, employment, and incomes because so much economic activity revolves around warehousing activity associated with NAFTA. The mayor of Nogales, AZ has worried that the impact could be to the tune of a 50% decline in those items should tariffs be imposed sufficient to adversely affect trade.

In southern California, the LAEDC estimates that 1 out of 15 jobs is related to trade coming through the Ports of Long Beach and Los Angeles. That is one example of why the overall economic impact could be greater than the direct credit impact. Either way the impact of a trade war would be negative. Even if our trade strategy is based on a border adjustment tax, there are many scenarios where the impact would not be as neutral as its proponents believes, the. In those instances the net impact on economic activity in terms of the movement of goods would be negative for the American side of the equation.

Muni Credit News February 9, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

IMPACT OF FOREIGN STUDENTS ON U.S. UNIVERSITIES

NYS COMMON RETIREMENT FUND ANNOUNCES EARNINGS

HOSPITALS IN LEGISLATIVE WAITING ROOM

PENNSYLVANIA BUDGET PROPOSAL

CONNECTICUT BUDGET PLAN ANNOUNCED

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IMPACT OF FOREIGN STUDENTS ON U.S. UNIVERSITIES

Much of the recent debate about the executive order limiting immigration has revolved around the potential effect on the U.S. economy and businesses. While it is clear that certain industries such as technology and research and development feel vulnerable, there has been less focus on its potential impact on the demand for and economics of U.S. institutions of higher education. This is especially true for public universities.

Over the last several years, states have been reducing their contributions to general state universities as they face increasing budget demands and demands for lower taxes. At the same time, the impact of student debt as an economic drag has increased pressure to slow the rate of tuition growth to in-state residents. One way to do this has been to increase the admittance of foreign students to these institutions.

The “flagship” campuses of state universities lead this trend. Illinois, Indiana, Iowa and University of California campuses in Berkeley and Los Angeles all had at least 10 percent foreign freshmen this academic year, more than twice that of five years ago. The University of Washington’s 2016 freshman class comprised 18% foreign students. Some charge international students additional fees besides tuition: at Purdue University, it was $1,000 this year and will double next year; engineering undergraduates at the University of Illinois at Urbana-Champaign had to pay a $2,500 surcharge this year.

Financially, the logic is compelling. Each seat occupied by a foreign “full fare” student lessens the revenue per seat required from in-state students either in the form of lower tuition or lower general revenue transfers from the respective states. In addition, these students (and relatives) spend what are effectively outside dollars in the local economies in the college towns.

The Institute of International Education, Inc. has assembled estimates of the economic impact from international students. For example, using the institutions referenced above, international economic impact was estimated at: Washington $825.5 million; Illinois $1.57 billion; Iowa $365.8 million; Indiana $956.5 million; California $5.2 billion. This includes tuition and fees, living expenses, and real estate investment by parents of these students (especially from China) who choose to either buy housing for their students or to live here while their students attend U.S. colleges.

For investors, the actual makeup of the student body at a given school should only be of concern as it pertains to the ability of a given institution to maintain a strong financial profile over a sustained period of time. The “moral”, political, and other social issues that arise from these enrollment trends are secondary from a pure investor point of view. That is not to say that they are not something to be monitored. If public low cost universities are not sufficiently available to the children of in-state taxpayers, political support for continued expenditure tax dollars will be further strained. And should stringent immigration limitations become so tight as to greatly limit the admission of international students, then there will be financial implications. But current trends in this area do not seem to be impacting credits supported by these institutions.

NYS COMMON RETIREMENT FUND ANNOUNCES EARNINGS

The New York State Common Retirement Fund’s (CRF) overall return in the third quarter of state fiscal year 2016-2017 was 1.11 percent for the three-month period ending Dec. 31, 2016, with an estimated value of $186 billion, according to New York State Comptroller Thomas P. DiNapoli. “The state pension fund enjoyed a solid third quarter and, barring a significant downturn, is headed for a successful year. We continue to focus on prudent, long-term management of investments to make sure our assets match our liabilities,” DiNapoli said. “Not long after I became Comptroller, the global financial crisis reduced our pension fund’s value to $108.9 billion. Despite volatility in the markets, my staff and I have rebuilt and strengthened the state pension fund to what it is today – a highly diversified fund with its highest ever estimated value.”

The CRF’s estimated value reflects benefits paid out during the quarter. The CRF ended its first quarter on June 30, 2016 with an overall return of 2 percent for the three-month period and an estimated value of $181 billion. Its second quarter closed on Sept. 30, 2016 with an overall return of 3.51 percent and an estimated value of $184.5 billion, the investments. The CRF’s audited value was $178.6 billion as of March 31, 2016, which is the end of the state fiscal year. That would translate to an increase of 4.4%. While this is below benchmarks for observes like the Boston College Center for Retirement Research which would use 6% growth as a target, it is better than many major pension funds have achieved.

As of Dec. 31, 2016, the CRF has 38.5 percent of its assets invested in publicly traded domestic equities and 15.6 percent in international public equities. The remaining Fund assets by allocation are invested in cash, bonds and mortgages (26.8 percent), private equity (7.7 percent), real estate (6.8 percent), absolute return strategies (3.2 percent) and opportunistic and real assets (1.4 percent).

HOSPITALS IN LEGISLATIVE WAITING ROOM

We’ve all had to sit endlessly in a doctor’s office or emergency room waiting area worrying about a diagnosis or outcome wondering if the cure will be worse than the disease. Well now hospital financial managers are getting to have a similar experience courtesy of the new administration. President Trump said in an interview that aired during the Super Bowl pre-game that a replacement health care law was not likely to be ready until either the end of this year or in 2018. “Maybe it’ll take till sometime into next year, but we’re certainly going to be in the process.”

This represents a major shift from promises by both him and Republican leaders to repeal and replace the law as soon as possible. “It statutorily takes awhile to get,” Mr. Trump said. “We’re going to be putting it in fairly soon, I think that, yes, I would like to say by the end of the year at least the rudiments but we should have something within the year and the following year.” Yes it may even be until 2018 until a replacement is enacted. Mr. Trump acknowledged that replacing the Affordable Care Act is complicated, though he reiterated his confidence that his administration could devise a plan that would work better than the law — despite having provided few details of how such a plan would work.

Asked about Trump’s comments, Sen. John Cornyn (R-Texas), the Senate’s No. 2 Republican emphasized that the initial repeal bill under reconciliation is just the beginning of the process, and that a series of smaller bills will follow. “We’ve said all along we’re going to start the process using budget reconciliation, but it’s not going to be all in one piece of legislation, they’ll be multiple steps,” Cornyn said. “You’ll have to ask him what he meant, but I think it’s going to take — it’s not going to be instantaneous, because there is going to need to be a transition period.”

Speaker Paul D. Ryan has vowed to move legislation for a replacement for the Affordable Care Act by the end of March. But some Republicans are worried about a political backlash if they repeal the law without an adequate replacement — potentially throwing millions of people off their insurance . One Republican congressman from California had to be escorted out of a town hall meeting on health reform by local police to ensure his safety.

Mr. Trump said that he wanted to present a replacement soon after the Senate confirmed his nominee for secretary of health and human services, Representative Tom Price, Republican of Georgia. The Senate is scheduled to vote on Mr. Price’s confirmation this week. “We’re going to be submitting, as soon as our secretary is approved, almost simultaneously, shortly thereafter, a plan,” Mr. Trump said in January. Senator Lamar Alexander of Tennessee, a Republican who is the chairman of the Senate Committee on Health, Education, Labor and Pensions, recently proposed repairing parts of the health care law ahead of scrapping the whole package.

Congressional Republicans have said they could include elements of a replacement plan in the repeal bill. Yet they note that full replacement cannot pass under the fast-track rules of reconciliation that allow a measure to avoid a filibuster. So far, the only action to repeal the ACA was last month when the president signed an executive order to begin unwinding the Affordable Care Act. It gave the Department of Health and Human Services the authority to ease what it called “unwarranted economic and regulatory burdens” from the existing law.

In the midst of this discussion, a consulting firm said that a Republican proposal to fund Medicaid could save up to $150billion over five years. The analysis from healthcare firm Avalere Health shows that if Medicaid were funded through block grants instead of through the open-ended commitment the program receives now, the federal government would save $150 billion by 2022. Savings from a shift to per capita caps, in which states would receive a set amount of money per beneficiary, would save $110 billion over five years. According to the study, only one state – North Dakota — would see increased funding under the block grant model. Through per capita funding, 26 states and D.C. would see decreases in federal funding while 24 would get an increase.

In the meantime, that isn’t much to go on for hospital managements looking at a June 30 FY end to embark on a serious planning process.

PENNSYLVANIA BUDGET PROPOSAL

Gov. Tom Wolf proposed a budget for fiscal 2018 in which there are no broad-based tax increases. It purports to set the Commonwealth on a sustainable fiscal course that will grow its rainy day fund from $245,000 today to almost $500 million by 2022. According to the Governor, this budget proposes reforms that, altogether, will save taxpayers more than $2 billion. The plan calls for an additional $125 million for K through 12 classrooms, $75 million to expand high-quality early childhood education, and $8.9 million for our state system of higher education.

The General Fund budget would be $32.3 billion, an increase of 1.8%. Motor license revenues are projected to increase by 3% but only account for $82 million. Tax revenue in the General Fund constitutes more than 97 percent of annual General Fund revenue. Four taxes account for the vast majority of General Fund tax revenue. The Personal Income Tax, the Sales and Use Tax, the Corporate Net Income Tax and the Gross Receipts Tax together provide approximately 86 percent of annual General Fund revenue. For non-tax revenue, the largest sources of revenue are typically from profit transfers from the Pennsylvania Liquor Control Board, licenses and fees, and the escheats or “unclaimed property” program.

For the five fiscal years ending with 2015-16, total General Fund revenue increased by 11.6 percent, an annual rate of increase of approximately 2.8 percent. The rate of growth for revenue during the period has been affected by the recent recovery from the economic recession and the increased economic growth during the post-recessionary period. Without adjusting for tax rate and base changes, the major tax revenue sources experiencing the largest growth during this period were the Realty Transfer Tax, the Personal Income Tax, and the Inheritance Tax. Five-year total increases for these tax types were 64.8 percent, 15.8 percent and 16.2 percent, respectively. Revenue from some tax sources declined or was flat over the period. Receipts from the Gross Receipt and Cigarette taxes decreased over this period. Non-tax revenue sources increased over this five-year period.

The Budget Stabilization Reserve Fund is to receive an annual transfer of 25 percent of the General Fund’s fiscal year ending balance. The transfer requirement is reduced to 10 percent of the General Fund’s ending balance if the balance of the Budget Stabilization Reserve Fund equals or exceeds 6 percent of actual General Fund revenues received for the fiscal year. Appropriations out of the Budget Stabilization Reserve Fund require approval by two-thirds of the members of each house of the General Assembly.

This budget proposes an overall decrease in the commonwealth’s current authorized salaried complement level in 2017-18 of 3,442 positions, from 81,036 to 77,594 positions. Pension and health benefit funding is projected at $6.9 billion, up from $6.7 billion in FY 2017. These expenses are projected to increase annually to $7.5 billion in period.

The projected growth in spending for reserves and employee pension and healthcare costs would be $1.3 billion by FY 2022. This growth assumes favorable economic and investment conditions through the period. The budget will be subject to a high level of risk as the Commonwealth is only a recent participant in Medicaid expansion under the Affordable Care Act. It would likely face significant pressure to cut expenses under either a block grant or per capita aid scenario. This will increase the pressure to address pensions and healthcare benefits for state retirees which have already weakened the Commonwealth’s ratings.

We expect another difficult and contentious budget approval process like those which have occurred during the first two years of the Wolf administration. We see no respite from the pressure on the Commonwealth’s ratings going forward.

CONNECTICUT BUDGET PLAN ANNOUNCED

The budget contains a total of $18 billion in General Fund spending. The expense increase is within the state spending cap and is at a pace well below inflation. It makes required increased contributions to the pension systems of more than $357 million in the first year. The Governor states that the plan contains $1.36 billion in new spending reductions. The budget assumes approximately $700 million in state employee labor savings. They would have to be achieved through negotiation.

At more than $5 billion, municipal aid accounts for our single largest state expenditure. And addressing town aid also means addressing educational aid, which amounts to $4.1 billion – or 81 percent – of all municipal funding from the state. The budget changes the educational cost sharing formula, or ECS. For the first time in more than a decade, the formula counts current enrollment. It is intended to stop reimbursing communities for students that they no longer have.

By recognizing shifting demographics in small towns and growing cities, state funding can change with time to reflect changing communities. The new formula also uses a different measure of wealth by using the equalized net grand list as well as a new measure of student poverty. In the proposed budget, Special Education is now a separate formula grant from ECS, and Special Education funding is increased by $10 million. School systems will also be required to seek Medicaid reimbursement where available, ensuring that no community leaves federal dollars on the table.

This year, state government is set to pay $1.2 billion for a system that supports 86,000 active and retired teachers and administrators. The Governor not proposing that teachers’ benefits be limited or cut back. The budget asks the towns and cities – all of them – to contribute one-third of the cost toward their teacher pensions. This would begin to match state pension policies for policemen, or firemen, or other municipal employees. While pressure on local budgets would be raised under this budget, it will create a Municipal Accountability Review Board, chaired by the State Treasurer and the Secretary of OPM.

This will be the most controversial part of the budget process. we would anticipate that there will be great resistance to the concept of localities assuming one-third of the teacher’s pension costs. we would not be surprised to see the entire process crater over this proposal. In combination with the reliance on negotiations to achieve other labor cost savings, we see the budget proposal as being of high risk to the State’s credit. We would expect the existing downward pressure on the ratings to exist, not only for the State, but also for many of its localities.

The Governor knows this and explicitly addressed it in his budget presentation. “My budget leaves $75 million in year one and $85 million the following year in local aid unallocated. This is my way of saying to you – the legislature – that I am ready to negotiate.” Those negotiations will occur and will be quite difficult. In the meantime the pressure on state and local finances will continue.

Muni Credit News February 7, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

RATING AGENCY FACEOFF OVER CHICAGO PUBLIC SCHOOLS

WAYNE COUNTY MICHIGAN UPGRADE

CONNECTICUT PENSION LEGISLATION

ATLANTIC CITY LAYOFFS DELAYED

TENNESSEE BUDGET PLAN INCLUDES GAS TAX INCREASE

FINRA ACTS AGAINST AN UNDERWRITER

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RATING AGENCY FACEOFF OVER CHICAGO PUBLIC SCHOOLS

It isn’t often that the rating agencies overtly disagree with each other. There are clear cases where they issue disparate ratings on the same credit, but they rarely issue a report which clearly highlights the disagreement. That changed last week when Fitch Ratings in a report openly criticized Moody’s Investors Services’ recent assessment of Chicago Public Schools’ new credit structure and the legal options available to ease its distress. The report’s title “Fitch Disagrees With Moody’s Legal Analysis On Chicago Public Schools” couldn’t be clearer.

Moody’s published special credit profile reports on Jan. 12 about the city and CPS. Moody’s had not been asked to rate new deals by either issuer, but maintains junk ratings on their older debt. Fitch is pretty clear about the disagreement being more than just a difference in opinion. “We read it and we didn’t feel all the information was correct and felt it would helpful to the market if we posed our reasons as to why we disagreed,” said the report’s co-author, Amy Laskey, a Fitch managing director.

“Our goal is to clearly articulate an opinion, and often that means openly disagreeing with other market participants. We may publish those comments if there is strong investor interest, or if we feel our view is meaningfully different from another,” said Fitch’s global head of corporate communications.

Fitch assigned an A rating based on confidence in the issue’s bankruptcy-remote structure. Fitch’s ‘A’ rating on the dedicated CIT bonds is based on a dedicated tax analysis without regard to the board’s financial operations. Fitch has been provided with legal opinions by board counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues’ under Section 902(2)(e) of the U.S. Bankruptcy Code in the event of a board bankruptcy.

At the time of the sale of bonds under this security in December, there was widespread disagreement in the market as to whether or not the pledged revenues constituted special revenues in a bankruptcy. The distinction is important as special revenue secured debt is usually paid in a Chapter 9 where general tax backed debt may not be paid.

Moody’s argument is based on its belief that the most likely scenario for CPS is that the district will levy for debt service on GO alternate revenue bonds in order to free up state aid for operations.” Moody’s suggests that triggering the ad valorem tax pledge used on most of its $6 billion of debt offered one option for CPS to free up revenue for operations.

The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations. Moody’s report suggests that the district could elect to use unrestricted general state aid for operations instead of debt service on its alternate bonds issued under the Illinois Local Government Debt Reform Act. Under the state’s alternate revenue structure, an ad valorem tax levy is imposed to repay bonds but it is typically abated as the “alternate” revenues are tapped. About $373 million in CPS state aid will go to such bond repayments this year.

Fitch takes the view that to apply alternate revenues to operations would draw a successful challenge in litigation opposing an attempt to levy taxes while alternate revenues were available for debt service.” Fitch argues that the act establishing the revenues “clearly” indicates that CPS must apply available alternate revenues to debt service. “Fitch also does not agree that the CIT bonds are secured by a statutory lien.”

Under the flow of funds, the CIT revenues are collected by the county collectors of Cook and DuPage Counties. The board has directed the collectors to transmit the CIT revenues directly to an escrow agent. The escrow agent transfers revenues needed for payment of debt service to the bond trustee daily. Revenues in excess of those required to meet annual debt service may be available to reimburse CPS for authorized capital expenditures.

The board covenants not to revoke the direction to the county collectors as long as the bonds are outstanding. Based upon review of bond counsel opinions Fitch believes that any future attempt to revoke the direction to the county collectors would be contrary to state statute. This creates an effective “lockbox” structure to protect the revenues. Moody’s had written that features like a “lockbox” on revenues helped “lessen but do not eliminate the risk of bondholder impairment in a future bankruptcy.”

Fitch does not agree that the CIT bonds are secured by a statutory lien. Fitch’s belief that the bonds would be protected in Chapter 9 stems from opinions that they meet the bankruptcy code’s designation of “pledged special revenues” which offers some insulation from impairment. The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations.

CPS asked only Fitch and Kroll Bond Rating Agency to review the bonds backed by the distinct property taxes pledged. Kroll assigned its BBB rating in line with its GO ratings of BBB and BBB-minus. Fitch rates CPS GO debt B-plus, with a stable outlook. The other two rating agencies also rate CPS GOs at junk. Our experience teaches that reliance on opinion of counsel rather than established court precedent through either outstanding litigation or a record established through a bond validation proceeding should be of little comfort. Under those circumstances, the most conservative view of the credit should prevail.

WAYNE COUNTY MICHIGAN UPGRADE

With so much focus on the City of Detroit and its efforts at recovery from bankruptcy, it is easy to overlook developments in surrounding Wayne County. So we draw attention to the news that Moody’s Investors Service has upgraded the rating of Wayne County, MI’s outstanding general obligation limited tax (GOLT) bonds to Ba1 from Ba2. The Ba1 rating is the same as Moody’s internal assessment of Wayne County’s hypothetical general obligation unlimited tax rating. The lack of notching reflects the full faith and credit nature of the county’s GOLT pledge and the availability of all general operating revenue to pay debt service. Moody’s has also upgraded to Ba1 from Ba2 the rating on outstanding lease revenue bonds issued by the Wayne County Building Authority. The county is the ultimate obligor of outstanding building authority bonds, with repayment similarly secured by the county’s full faith and credit pledge and not subject to annual appropriation.

Wayne County’s GOLT bonds are secured by its pledge and authority to levy property taxes within statutory and constitutional limitations to pay debt service. Debt service is not secured by a dedicated tax levy. Bonds issued by the Wayne County Building Authority are secured by lease payments made to the authority by the county. The lease payments are secured by the county’s full faith and credit pledge, equivalent to its pledge on GOLT bonds, and are not subject to appropriation.

The stable outlook reflects the likelihood of credit stability given an improved balance sheet and financial position that mitigate challenges associated with a weak economic profile, negative demographic trends and outstanding borrowing needs.

CONNECTICUT PENSION LEGISLATION

It’s the kind of move that makes one wonder if legislators understand the seriousness of the pension funding crisis. In a strict party-line vote, the Connecticut General Assembly approved a pension refinancing that was negotiated by Governor Dannel Malloy’s administration last year. House Democrats narrowly approved it, and then, for the first time in 2017, Lieutenant Governor Nancy Wyman broke a 17-17 tie between Democrats and Republicans in the State Senate.

Earlier in the day, Republicans seriously considered derailing the pension agreement, due to their objections that the refinancing plan wasn’t comprehensive enough. The agreement had been announced on Dec. 9, 2016. It took the prudent step to lower expected investment returns for state employees and reduced annual state payments to the fund. It also aimed to restructure a projected $6 billion balloon payment in 2032, that state analysts have described as a kind of fiscal cliff for Connecticut.

The level of debate is concerning and illustrates why the market is concerned about the State’s long term credit. The Republican President Pro Tem asked, “What’s the rush? This bill hits in 2032.” We can take time, look at different ways.” He was looking for additional union concessions paired with refinancing . He claimed not to have received information regarding the agreement until last week (yes, the deal announced two months ago), as the deal passed a committee with Republican and Democrat votes.

Fasano said if the main goal was to free up money with reduced pension payments in order to the balance the budget, then that was an irresponsible choice. “I don’t think that’s a good plan for the state. I don’t think it’s a good plan for the union employees because that money should go into the union. That money should go into the coffers and grow.” So if it shouldn’t balance the budget and improve the likelihood of pensions being paid, it’s a bad idea?

We are not holding our breath for an upgrade.

ATLANTIC CITY LAYOFFS DELAYED

And so it goes in the effort by the state to manage the city’s finances. An Atlantic County Superior Court Judge issued a restraining order against the state after International Association of Fire Fighters Local 198 re-filed a lawsuit last week to avoid layoffs, a new work schedule and deep cuts to benefits. The state’s attorney said in a letter that layoffs wouldn’t be implemented until September, when a federal grant covering 85 firefighters expires. The order also temporarily blocks state officials from taking any unilateral actions against the union under the so-called takeover law.

The state planned to implement changes to the union’s contract Feb. 19, including new salary guides, elimination of education and terminal leave pay, and establishment of a new work schedule under which all firefighters would work one 24-hour shift followed by two days off. State officials claim the judge’s decision doesn’t change the state’s timeline to implement the contract changes. “We decided to delay implementing the proposed contract reforms until Feb. 19 as a good faith gesture to give the fire department more time to prepare,” said the Department of Community Affairs.

“So, the TRO, in effect, is restraining us until Feb. 13 from implementing any changes, which we already stated we won’t start implementing until Feb. 19,” Ryan said. The union lawsuit claims the state takeover law is unconstitutional since it impairs the contract rights of the union, among other reasons. It ultimately seeks a permanent injunction prohibiting the state from using its takeover powers against the firefighters.

A hearing was scheduled at Atlantic County Civil Court in Atlantic City. But the case has since been removed to federal court, Ryan said. The union wanted to keep the case in state court in the belief the contract clause of the state constitution is stronger than that of the federal constitution. The union withdrew its initial lawsuit Wednesday after the state postponed contract changes for two weeks.

The city has a $100 million budget gap. The state’s proposed Fire Department changes would save the city less than $8 million annually, according to the union’s suit. The fire union argues that proposed cuts would make the city unsafe. And it says fire department costs make up just 7 percent of the city’s $240 million budget. The potential 100 layoffs would cut nearly half of the department’s 225 firefighters. “The 44 percent (staff) reduction could lead either to understaffed responses to high rise fires, or inadequate responses to other smaller fires while high rise fires are being fought,” the union’s suit said.

TENNESSEE BUDGET PLAN INCLUDES GAS TAX INCREASE

Tennessee Gov. Bill Haslam unveiled a $37 billion annual spending plan, urging lawmakers to adopt his recommended gas tax increases to pay for better roads and reject temptations to dodge it by turning to burgeoning revenues in other non-transportation areas to fund it instead. He proposed a 7-cent-per-gallon increase in gas and 12-cent boost on diesel. If adopted, the governor’s recommendations would include Tennessee’s first fuel tax increases in nearly 28 years. Lawmakers, he warned, shouldn’t be tempted to use one-time money on road funding.

“I have never thought that it was a good plan to pay for a long-term need like $10.5 billion in approved and needed road projects with a short-term surplus,” Haslam said of his plan to address a nearly 1,000-project backlog. “Third, and the most fundamental, in my proposal — an estimated half or more of the increased revenue — would come from non-Tennesseans and trucking companies” under his gas tax increase plan. his $278.5 million tax increase plan, which would also increase fees for vehicle registration, implement the first time indexing fuel prices once every year with caps to inflation and other measures.

Offsets to the fuel tax increases include cutting the 5 percent sales tax on groceries by a half percentage point, or $55 million, a $113 million cut in business franchise taxes for manufacturers whose operations generate well-paying jobs, and accelerating the current phase-out of an income tax on individuals’ investments, which will cost the state $102 million annually.

FINRA ACTS AGAINST AN UNDERWRITER

The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Phoenix-based Lawson Financial Corporation, Inc. (LFC) from FINRA membership, and has barred LFC’s CEO and President Robert Lawson from the securities industry for committing securities fraud when they sold millions of dollars of municipal revenue bonds to LFC customers.

The bonds at issue were underwritten by LFC and related to an Arizona charter school and two assisted living facilities in Alabama (which were the borrowers on the bonds). FINRA found that Robert Lawson and LFC were aware that each borrower faced financial difficulties, and Lawson transferred millions of dollars to the borrowers and associated parties from a deceased customer’s trust account, in order to hide the borrowers’ financial condition and to hide the risks associated with the bonds. FINRA determined that when LFC customers purchased the bonds, LFC and Lawson hid the material fact that Lawson was improperly transferring millions of dollars from the trust account to various parties when the borrowers were not able to pay their operating expenses or required interest payments on the bonds.

FINRA found that Lawson and his wife, Pamela Lawson (LFC’s Chief Operating Officer), who were co-trustees of the trust account, violated FINRA rules by breaching their fiduciary duties as trustees and engaging in self-dealing with the trust account. FINRA also determined that Robert Lawson misused customer funds. In addition to expelling LFC and barring Robert Lawson, FINRA suspended Pamela Lawson from associating with any FINRA member firm for two years and fined her $30,000 to be paid prior to her return to the securities industry. This disciplinary action settles a May 2016 complaint filed against LFC, Robert Lawson, and Pamela Lawson.

In settling this matter, LFC, Robert Lawson and Pamela Lawson neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Muni Credit News February 2, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

DESIGN BUILD FOR NYC

WHY INFRASTRUCTURE IS SO HARD

MUST BE NICE TO HAVE A SURPLUS

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

RAIDERS OF THE LOST STADIUM DEAL

FLORIDA BUDGET SUBMITTED BY GOVERNOR

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DESIGN BUILD FOR NYC

In his latest budget proposal, Governor Andrew Cuomo granted design-build authority to all state agencies, but that did not include New York City agencies—leaving the city at a disadvantage when it undertakes capital projects. Currently, there are three major projects using the concept in the NYC metropolitan area. They are the Tappan Zee and Goethals Bridge replacements and the LaGuardia airport rebuild project.

Mayor Bill DeBlasio recently sought the support of the influential New York Building Congress in his fight to get Albany to extend so-called “design-build authority”—believed to expedite the construction process while decreasing costs—to New York City instead of just reserving it for state infrastructure projects. The situation results from the City’s home rule status which gives the State approval rights over many city policies.

There has not been significant opposition to the use of design build on the three projects. They have created jobs and that has been enough to tamp down union opposition to changes in funding rules which might be perceived as threatening to job levels. This has always been a central problem in efforts to reform and streamline the execution of major capital projects in the city and state. Adoption of the proposal would be seen as credit positive for the city as it would be a useful tool in reducing some of the City’s risks in capital project delivery and reducing costs and capital requirements through efficiencies.

WHY INFRASTRUCTURE IS SO HARD

In our last issue, we highlighted a list of 50 high priority infrastructure projects – public, private, and P3 – submitted by the nation’s governors in response to a request from the Trump transition team. Among them were two privately sponsored and financed power projects. One would transmit renewable energy from a power generation complex in Wyoming for sale into the California, Arizona, and Nevada power markets. The second project is the generation facility itself – a wind powered complex. The two projects are estimated to produce 4,000 direct jobs and 4,000 indirect jobs reflecting an investment of some $8 billion of private capital. Both projects are fully engineered and 95% permitted. Sounds like a Trumpian dream?

Well one man’s dream is another man’s nightmare apparently. A bill filed in the Wyoming legislature would require utility companies within the state to provide electricity to their customers that comes from “eligible resources.” These would include coal, hydroelectric, natural gas, nuclear, and oil. Electricity from renewable energy sources like rooftop solar or backyard wind projects would also be permitted. The bill would require 95% of all electricity in the state to be derived from “qualified resources” by 2018 and 100% by 2019.

It is billed as a renewable energy law. Any utility company who violates the proposed new renewable energy law would be fined $10 for every megawatt of non-conforming electricity provided to Wyoming residents. Now Wyoming is a large exporter of energy. It is the nation’s largest producer of coal, fourth largest natural gas producer, and eighth among US states in crude oil production. It also one of the consistently windiest states and as such is rated highly as a source of wind power. In fact, several large wind energy installations are in existence in the state or are under construction, but all of their output is scheduled to go to customers in other states. Under the proposed legislation the sale of electricity from wind or solar farms to Wyoming residents would be illegal.

The bill’s principal sponsor bases it on the following: “Wyoming is a great wind state and we produce a lot of wind energy. We also produce a lot of conventional energy, many times our needs. The electricity generated by coal is amongst the least expensive in the country. We want Wyoming residences to benefit from this inexpensive electrical generation. We do not want to be averaged into the other states that require a certain [percentage] of more expensive renewable energy.”

In truth, the effort is one of job preservation in the coal industry. A co-sponsor of the bill says “The controversy of climate change affects our families in Campbell County. Coal = Jobs. The fact of the matter is that man-made climate change is not settled science. Instead, it is hotly disputed by reputable and educated men and women….” Wyoming is also considering taxing in-state wind farms that export electricity to other states. So don’t be surprised if these two projects become casualties rather than candidates under any proposed infrastructure bill.

The situation serves to highlight to complexities which be devil any attempt to undertake a large scale infrastructure program in the current environment. Big plans and projects require big thinking and big thinking clashes with the parochial interests and views of the many constituencies impacted by such a program. This is especially true in areas the likes of which provided the President with his base of support. So try as he might, it might be harder for him to follow through on his goals than he thought since the same people he is trying to please are sometimes his greatest opposition.

MUST BE NICE TO HAVE A SURPLUS

While it is the case in most states that the challenges of sluggish fourth quarter growth and its effect on revenues are the primary concern of state budget makers, Minnesota Gov. Mark Dayton’s final two-year spending plan for the state is an exception. At $45.8 billion, the proposed 2018-19 budget amounts to a 10 percent increase from the current budget of $41.8 billion. The governor has had some clear priorities for his tenure. They include a gas tax to pay for work on roads and bridges, and money to help more students attend prekindergarten programs. His proposal includes a new strategy for stabilizing health care costs: expanding the state’s MinnesotaCare health insurance program to provide a public option for more people.

Additional bigger ticket items include an additional $371 million added to Minnesota’s per-pupil funding formula, which would amount to a 2 percent increase in state spending on each public school student in each of the next two years. Under the proposal, $75 million in new money would be used to expand prekindergarten options in public schools. Dayton said, “It would deliver excellent educations for all our students, support job creation across our state, and create cleaner, healthier futures for all Minnesotans.” After seeking $312 million in rebates for health insurance customers facing premium spikes, Dayton also wants $12 million to expand the MinnesotaCare public insurance program to more people.

About 450,000 Minnesotans would see some kind of tax relief under Dayton’s proposal including farmers, parents paying for child care and charities. The plan calls for $318 million in new money for public colleges and universities, including money for student financial aid, to help homeless students and efforts to reduce campus sexual assault. Not waiting for a federal plan, Dayton renewed his call for a 6.5 percent gas tax increase to finance the rapidly escalating need to repair, replace and expand Minnesota roads, bridges and transit systems.

Much of the spending in the governor’s plan draws from the $1.4 billion surplus expected to be left over at the end of the state’s current fiscal year. That surplus and some control on spending helped Minnesota obtain an upgrade in 2016. The spending blueprint was seen as facing an uphill battle with a GOP-controlled Legislature. Republican lawmakers confirmed that by saying they agreed with many of the governor’s priorities but not with how much he wants to spend.

The debate is a nice one to be able to have and would seem to place the state’s credit in a small group that sees its finances showing positive trends. It also shows that divided state government need not be a basis for stalemate and declining ratings.

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

As part of its compromise budget package, the Illinois Senate has proposed to borrow $7 billion to pay off a large portion of the existing backlog. Senate Bill 4 would raise the total borrowing limit by $7 billion, provide for the bonds to be issued in early FY2018 and calls for level debt service payments over seven years (as opposed to the State’s usual practice of level principal).The proceeds of the sale would be deposited into the General Revenue Fund, but the statute restricts their use to paying off the backlog and instructs the Comptroller and the Treasurer to make payments “as soon as practical.” Implementation of this bill is contingent on passage of the other bills in the Senate package which provide for increased revenue, reforms to workers’ compensation and procurement, a two-year property tax freeze and appropriations to finish FY2017.

The Federation made a few arguments in favor of borrowing. In its view, the first and most compelling is that for a considerable portion of the backlog the state could save on interest cost. It cites the State Prompt Payment Act, which establishes that most bills that are more than 90 days old accrue interest at 1% per month, or more than 12% annually. Bills from healthcare providers accrue 9% after 30 days, as specified by the Illinois Insurance Code. The federation was unable to determine the percentage of bills that bear interest at each rate, and interest is only paid when the bill is finally paid. That made it hard to calculate the actual total interest cost on the bill backlog. It was able to calculate interest payments in past years. Even with a smaller backlog interest peaked at $318 million in FY2013. Interest payments have been lower in FY2016 and FY2017 only because the lack of a full-year budget has delayed the payment of bills. The Comptroller’s Office estimates that accrued but unpaid interest penalties in FY2017 were in the hundreds of millions of dollars. Even if there is a substantial increase in interest rates, the total borrowing cost of the bonds would still be lower than the 9% to 12% the state currently pays.

The Civic Federation did offer some suggested concepts which it feels should guide any plan for borrowing to pay off the backlog: The borrowing must be paired with a comprehensive, credible plan to balance the budget in FY2018 and match expenditures to revenues for the foreseeable future; the borrowing should be as short as possible in duration to minimize the burden on future fiscal years; the proceeds should be strictly limited to repaying existing, overdue bills; and the State should identify revenues for debt service not otherwise needed to balance the budget.

RAIDERS OF THE LOST STADIUM DEAL

This week’s news that the existing financing plan for a stadium in Las Vegas for the Oakland Raiders to move into had collapsed was not a complete shock. The family of Las Vegas Sands Corp. Chairman and CEO Sheldon Adelson has withdrawn as investors in a proposed $1.9 billion, 65,000-seat domed football stadium. Adelson said he was surprised by the Raiders’ submission of a proposed lease agreement to the Las Vegas Stadium Authority. Raiders representatives told the Stadium Authority board that construction would be financed by Goldman Sachs — with or without the Adelsons as partners.

Under the Southern Nevada Tourism Improvements Act, the Stadium Authority would still have until mid-2018 to attract an NFL team to the planned stadium. If an NFL team is not secured by mid-2018, the Stadium Authority would be dissolved and UNLV officials would be required to deliver notice to the governor of their intent to build a smaller collegiate stadium for the Rebel football team. UNLV officials would have two years to raise $200 million toward the project, and tax revenue generated by the increased hotel tax would be dedicated to that stadium effort instead.

In light of the Adelson’s announcement, Goldman Sachs pulled away from the project Tuesday. Apparently, Goldman’s other relationships with the Adelsons might have been jeopardized if it proceeded on the stadium without them. Goldman has many complicated relationships with NFL teams as one of the leading bankers in the stadium finance sector. They are also banker to the San Diego now Los Angeles Chargers outside of stadium financing.

So where do the Raiders turn to now? They could recruit another big-money Las Vegas investor such as another casino owner, consider a move to San Diego, try to share Levi Stadium in Santa Clara (which Goldman financed for the 49ers), or try to get a new or refurbished home in Oakland. Possible providers of public financing will now have additional leverage and the scenario in Las Vegas which left local politicians feeling hosed to a great extent will not help to generate public support for tax dollars to be used on a facility. An investment group backed by Fortress Investments including former 49ers and Raiders star Ronnie Lott has proposed to build a $1.25 billion, 55,000-seat stadium at the present site.

38 STUDIOS LITIGATION REACHES FINAL SETTLEMENT

The last defendant in a civil suit by the State of Rhode Island, Hilltop (nee First Southwest) Securities has agreed to pay the State $16 million to settle the litigation regarding the State’s issuance of $75 million of debt to finance a failed video game venture founded by former Major League pitcher Curt Schilling. Now that the litigation is settled, Governor Gina Raimondo said: “I am pleased with the proposed settlement of $16 million from First Southwest. But we cannot rest on monetary recovery alone. If the Court approves this settlement, the civil case will end and I will immediately petition the Court for the release of all materials associated with the grand jury investigation of 38 Studios. Rhode Islanders deserve to have access to all of the information that is known. Complete transparency is the best way to ensure that such a disastrous deal never happens again.”

Ever since 38 Studios went bankrupt, the State under its moral obligation pledge has had to make semiannual interest and annual principal payments on the bonds. This latest settlement would bring to $61 million the amount recovered by the state from a string of defendants. The Corporation previously settled claims against Curt Schilling, three codefendants and their insurer for $2.5 million in September 2016; Wells Fargo Securities, LLC and Barclays Capital Inc. for $25.625 million in August 2016; one law firm for $4.4 million in June 2014; and another law firm for $12.5 million in August, 2015.

The transaction and ensuing litigation highlights the risks inherent in the use of public issuers and funds to finance speculative private ventures. The pursuit of jobs and economic development is a legitimate role for public entities but it must be done cautiously and thoughtfully lest the potential financial risk threaten the creditworthiness of the public entities involved.

FLORIDA BUDGET SUBMITTED BY GOVERNOR

Governor Rick Scott has submitted his proposed fiscal 2018 budget to the Florida legislature. The budget calls for spending of $83.474 billion, an increase of 1.45% above FY 2017 levels. Over 60% of state spending will be for health and education. Billed as the “Fighting for Florida’s Future” budget it proposes to cut taxes by more than $618 million including decreasing the tax on business rents, providing a one-year sales tax exemption on college textbooks, cutting the business tax, exempting school book fairs from the sales tax and implementing a 10-day back-to-school sales tax holiday, nine-day disaster preparedness sales tax holiday, three-day veteran’s sales tax holiday and one-day camping and fishing sales tax holiday.

The plan is represented a producing nearly $21 billion in state and local funding through the Florida Educational Finance Program (FEFP) for Florida’s K-12 public schools which equates to $7,421 per student. This is the highest total funding, state funding and per-student funding for K-12 in Florida’s history. The budget anticipates a 3.3% increase in revenues primarily from increased sales tax revenues. The General Fund relies upon sales taxes for just under 80% of its projected revenues.

Muni Credit News January 31, 2017

Joseph Krist

joseph.krist@municreditnews.com

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INFRASTRUCTURE WISH LIST

Last month, the Trump transition team asked the governors association to collect infrastructure wish lists from the states, with an emphasis on “shovel ready” projects that are far enough along in engineering, approval and even construction to begin using the money quickly, and those that enhance national security and economic competitiveness, especially in manufacturing. The president has expressed a preference for private partnerships. Well a list has emerged and we noticed a few trends.

The National Governors Association has released its Priority List – Emergency and National Security Projects. It includes roads, port facilities, dams, river locks, mass transit, bridges, tunnels, and power facilities among others. Some are traditional publicly financed projects seeking federal assistance under traditional programs. Others are wholly privately funded while others are some form of public private partnership. Of the 50 projects on the list, 11 are federal Army Corps of engineers river lock projects. Two others involve all federal projects.

We note some old favorites on the list. These include New York’s Second Avenue Subway, the Maryland Purple Line P3 (MCN 8/4/16), and the Texas Central Railway (7/21/16). The latter two have had their share of controversy over a variety of issues which have held up progress. Those issues will not easily disappear through inclusion on this list.

Of note are the proposed energy projects whether for generation or transmission. These are generally private projects which would now benefit from any infrastructure tax credits which might be adopted through either tax reform or infrastructure legislation. It does not appear that they were ever anything but private projects. They include wind power in Wyoming, transmission in the Southwest, the Northwest, and in New York State. Water supply and storage projects on the list are all private developments as well although end users can be municipal systems and/or customers.

The projects represent various degrees of technological risk if for no other reason than their scale. Of great interest is a privately developed electricity storage system being undertaken in Southern California. Simply put, the project would be a set of giant batteries which could be used to store power generated by renewable energy generation sources and then used to in place of peaking generating units. These have tended to be older less efficient (and dirtier) generating units which are more readily turned on and off. Advances in this technology would have real implications for the use of renewable generation nationwide.

It would seem on its face natural to assume that there would be a place for the low-cost benefits of municipal bond financing in the overall infrastructure scheme. A number of established municipal bond issuers are participants in these projects. They include the Port Authority of New York and New Jersey, Chicago Transit Authority, the Miami-Dade Expressway Authority, the Port of Seattle, the Saint Louis Airport Commission, the Greater New Orleans Expressway Commission, the MTA, the MBTA, Dallas Area Rapid Transit (DART), Northeast Ohio Regional Sewer District, and Departments of Transportation in Colorado, New Hampshire, Ohio, Kentucky, and Pennsylvania. The diversity of issuers by purpose as well as by location would seem to create a foundation of support for the use of tax exempt bonds going forward.

PREPA

The Puerto Rico Energy Commission (PREC) ordered the Puerto Rico Electric Power Authority (PREPA) “to use all reasonable efforts to persuade the Promesa Oversight Board to provide the maximum debt-service relief available, demonstrating to that board how the savings will benefit the commonwealth’s economy and consumers.”PREPA has said it will defend the current restructuring agreement negotiated with 70% of the bondholders and which cut the debt by 15% before the board, established by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), was set up.

“PREPA wants to use Promesa to force all the creditors to accept the 15% cut, but that is not the best alternative. PREC is telling PREPA to use all of its powers under Promesa to get the best deal possible,” he said. The PREC order gave PREPA 120 directives on its operations, which business and renewable energy officials said virtually put the utility “under a trust” and under the complete control of the commission. While the order establishes new rates, they will not be permanent. The first rate-revision case will be in October 2017 to determine revenue requirements as well as start evaluating PREPA’s future budgets.

The order raised the basic electricity rate but resulted in a cut in the provisional rate imposed by PREPA last year. The average basic rate was set permanently at 1.025¢ per kilowatt-hour (kWh) compared with 1.299¢ per kWh for the provisional rate. The reduction of 27.4¢ per kWh is the equivalent of $45 million in savings yearly for consumers and businesses. The basic residential rate is 4.34¢ per kWh while the commercial and industrial rates are between 7.67¢ per kWh and 7.80¢ per kWh but those rates do not include other costs and fuel adjustments.

The commission did not raise the “demand charges” for the industrial sector. PREC also established controls over the utility’s debt, set guidelines for PREPA to be transparent and have clear, well-understood accounting records; ordered a performance probe into the utility; and established a process to periodically revise tariffs, which means the rate the commission set is not going to be permanent.

The order hinders the integration of renewables into the system; does not discuss the issue of private investment to help deal with PREPA’s inability to access markets; and does not give adequate weight to the impact of the tariffs on economic development, promote manufacturing through competitive costs or promote wheeling to force PREPA into providing more competitive costs.

One estimate is that PREPA’s level of debt is the equivalent of 5.6¢ per kWh, or 24.5% of the utility’s total costs after restructuring. For these reasons, the commission ordered PREPA to take “all actions possible” to use the Promesa process for the advantage of PREPA’s customers. “If and when these changes occur, PREPA shall inform the commission of the necessary changes to the revenue requirement. On receiving that information, the commission will determine how and when to adjust the revenue requirement,” PREC said.

According to PREC, the final debt costs to PREPA’s ratepayers will depend on the application of Promesa’s provisions. Under Section 601 of Promesa, if a certain percentage of bondholders choose to participate in a debt-restructuring process, the oversight board can require the remaining bondholders to participate as well. PREPA’s RSA is only with 70% of its creditors and the utility wants to include them all. PREC said that if all creditors participate in the restructuring agreement, some $314 million in debt would move out of PREPA’s fiscal year 2017 revenue requirement and into PREPA’s revitalization corporation revenue requirement, to be recovered through the new transition charge. “Ratepayers would save money because all the debt, rather than only the participating debt, would be subject to the 85% recovery cap, the lower interest rate and the five-year principal holiday called for by the restructuring support agreement.

In its order, PREC did not pass judgment on the performance of PREPA’s Chief Restructuring Officer in the debt-restructuring negotiations because the intervenors in the technical hearings did not present evidence to show she could have obtained a better deal. PREPA has already obtained from most bondholders a 15% reduction in principal, lower interest rates and a five-year deferral of principal. “No intervenor presented evidence that PREPA could have obtained more concessions had it bargained more effectively,” the commission said. “In a political setting, it may be acceptable to complain about costs. In an administrative adjudication, arguments require evidence.”

PREC noted that there has been a reduction in technical staff and the system was very poorly maintained in 2014 and 2015, adding that PREPA’s situation was far more serious than expected. Puerto Rico’s government-run electricity utility and its creditors agreed to extend a restructuring agreement, giving the authority more time to comply with the only deal the island has reached to cut some of its $70 billion debt. PREPA extended a deadline contained in the deal until Feb. 28, creditors said

SANCTUARY CITIES FACE FISCAL TEST

New York; Oakland, Los Angeles; Minneapolis; San Francisco; and Seattle are all so called sanctuary cities. Other cities like Philadelphia have declared themselves “Fourth Amendment” cities and refuse to support unreasonable searches and seizures and no longer commit their police to federal immigration work. With his executive order on immigration, President Trump has threatened to withhold federal funding from cities which refuse to cooperate with federal immigration enforcement efforts. For many cities with this status, a loss of federal funding could cause real fiscal distress. There is however, real uncertainty about how enforceable this threat is.

On November 20, 2014, an executive order directed Immigration and Customs Enforcement (ICE) to discontinue the Secure Communities program, under which noncitizens arrested by local law enforcement could be detained and eventually transferred to federal custody to process their deportations. In 2014 several federal district courts had found that local police would be liable for civil rights violations if they heeded ICE detainer requests by keeping noncitizens in custody when a citizen in the same situation would be released.

The constitutional problem was that ICE does not obtain judicial warrants before it arrests immigrants for deportation. Nor is there any immediate probable cause finding. In immigration enforcement, warrantless arrests are the norm, and there is no automatic, neutral review of probable cause if the arrested person is held in custody as would be required in a criminal case under the Fourth Amendment. As a result, federal district courts found no legal basis for local police to detain people, even when an ICE officer believed them to be in the country unlawfully.

Cities and counties will rely on this trend of court findings to support their refusal to support ICE detainer requests. They will additionally rely on the June 28, 2012, U.S. Supreme Court decision in the case challenging the constitutionality of the Affordable Care Act (ACA), National Federation of Independent Business (NFIB) v. Sebelius. The Constitution grants Congress certain enumerated powers, and when Congress acts within those power, its laws are supreme. All powers that are not specifically enumerated in the Constitution as belonging to the federal government remain with the states pursuant to the Tenth Amendment. If Congress oversteps by enacting a law (or the President issues an executive order) that exceeds its powers, the Supreme Court has authority to declare the law or order invalid.

In NFIB v. Sebelius, the Roberts plurality found that when conditions on the use of federal funds “take the form of threats to terminate other significant independent grants,” as opposed to governing the use of the funds themselves, Congress has impermissibly pressured states to implement policy changes. In their joint dissent, Justices Scalia, Kennedy, Thomas, and Alito stressed that the “legitimacy of attaching conditions to federal grants to the States depends on the voluntariness of the States’ choice to accept or decline the offered package.”

According to this group, while Congress may encourage states to regulate in a certain manner, Congress may not compel states to do so because political accountability would be threatened. Like the Roberts plurality, the joint dissent notes that Congress is prohibited from directly “‘commandeer[ing] the legislative processes of the States by directly compelling them to enact and enforce a federal regulatory program,” and Congress should not be able to effectively accomplish the same goal by coercing states to participate in federal spending programs.

Based on this body of existing legal thinking, we think that the immediate danger to local fiscal positions is not high. We expect that any hold back of funds would be greeted with a strong legal response from entities with both the means and the motivation to pursue all of their legal options. It is important during this tumultuous time in America’s politics to remember that much of what is emanating from the White House in this first week are symbolic actions designed to show the appearance of real sustainable actions. Many of them will require action by Congress for them to be funded and implemented while others, such as this one, will be subject to extensive judicial review. Our view is that none of them at present should be the basis for credit concern.

ILLINOIS DELAYS BUDGET VOTE

Illinois state senators have deferred their planned vote on a compromise to end a historic budget deadlock until February. Not a single vote was recorded on what has been called the “grand bargain” to loosen the grip of stalemate between Democrats who control the Legislature and Republican Gov. Bruce Rauner. This is the longest period a state has gone with no spending plan since World War II. It has created a projected deficit of $5.3 billion, $11 billion in overdue bills and a $130 billion gap in what’s needed to cover retirees’ pensions.

Senate President John Cullerton, said “The problems we face are not going to disappear; they’re going to get more difficult every day. When we return Feb. 7, everybody should be ready and prepared to vote.” The plan raises the income tax and creates a service tax to beat down the deficit; includes cost-saving measures to the workers’ compensation program and a property-tax freeze sought by Governor Rauner. Pension- and school-funding overhauls are included as well as expanded casino gambling and more.

In the meantime, Attorney General Lisa Madigan, a Democrat, filed a motion in St. Clair County Circuit Court, requesting a judge to dissolve his July 2015 order that authorized the state comptroller to pay wages of all Illinois employees despite the state not having a budget in place, court documents showed. The order has “removed much of the urgency for the legislature and the governor to act on a budget,” Madigan said in a statement.

ANOTHER RECREATION PROJECT THREATENS A COUNTY CREDIT

Time and time again, local governments get themselves mixed up with private recreational attractions which come back to bite them financially. One more example of this is in Kentucky. Floyd County saw its rating lowered to Ba1 in 2013. The move reflects the county’s reliance on volatile and declining intergovernmental revenues derived from coal severance taxes to subsidize its increasingly unbalanced operations. The rating also reflects substantial tax base concentration in coal mining and a weak socioeconomic profile, with poverty and unemployment levels much higher than state and national medians. The downgrade also captures significant risk related to county debt issued for the Thunder Ridge Racetrack.

Now the racetrack threatens to severely impact County finances. For several years, Keeneland (the thoroughbred breedstock seller) was in talks with Appalachian Racing Inc., which owns and operates Thunder Ridge, to buy that track’s license. The plan was for Keeneland to move the license to a quarter-horse track that it wants to build in Corbin. Floyd County officials had hoped that deal would include paying off the debt left on a $2.7 million bond that the county issued in 1993 to help the Thunder Ridge project.
But Keeneland has announced it would no longer pursue the Thunder Ridge license and will instead apply for the state’s ninth license, which is not assigned to any track. Keeneland also said its potential deal to buy Thunder Ridge never included debt on the Floyd County bond. The County believes that it had a separate agreement with ARI that if Keeneland bought the Thunder Ridge license, ARI would pay off the bond debt.

Without the sale, local officials are concerned that the company someday either won’t or can’t keep up the payments which are relied upon to pay debt service. The County would then be responsible. Expenses at Thunder Ridge have outstripped revenue for several years. The county has no surplus to pay the $2.1 million. Five years ago, the county’s annual budget neared $20 million, but that has been cut to $11 million in the face of a declining coal industry.

The Thunder Ridge deal was set up with a $2.7 million bond issued by the Floyd County Public Properties Corp. Thunder Ridge declared bankruptcy in 1994 but reorganized and stayed open, sometimes asking for Floyd County’s help with bond payments. Now, a refinancing deal was issued in April 2016 and will be due May 1, 2017. It is not clear what will happen if the County is unable to refinance the bonds.

DISCLOSURE STILL AN UPHILL TASK

We had the opportunity to participate in a roundtable involving issuers, investors, and accounting professionals hosted by the Governmental Accounting Standards Board. The subject was what kind of information should be required to be included in the notes to audited financial statements. For the average individual it wasn’t riveting stuff, but for the professionals in the room it provided a window into the various prisms through which providers and users of governmental accounting see the purpose and value of their financial statements.

For large issuers of debt supported by the financial and technical resources, compliance with accounting standards is often simply an issue of will. Their need for regular access to the public financial markets in substantial amounts makes the need for investor friendly disclosure clear if not obvious. In spite of some four decades of effort by the Board and the investor community, smaller irregular issuers still do not necessarily see the need for the level of detail investors desire. In other cases, their overseers (usually boards of directors) are not supportive of efforts to provide information outside of what they see as the scope of their requirements.

My biggest take away from the event is that the effort to obtain fully investor friendly financial accounting from issuers in the tax exempt market will have to continue. Until issuers which do not provide that kind of information lose public market access, they will resist implementation of these “best practices” and investors will continue to be subject to the kind of surprises we discuss in cases like the one just discussed involving Floyd County, KY.

Muni Credit News January 26, 2017

Joseph Krist

joseph.krist@municreditnews.com

THE HEADLINES…

MEDICAID BLOCK GRANTS

GOVERNMENTS WILL FACE PRESSURE

NYC

SEC REMAINS ACTIVE

INFRASTRUCTURE

PR DIVIDE REMAINS WIDE

_________________________________________________________________________________

WILL MEDICAID BLOCK GRANTS CAUSE STATE BUDGET HAVOC

If you wanted a sure fire way to throw a wrench into the state budget making process, proposing block granting the Federal share of Medicaid is a pretty good place to start. So in spite of the many issues such a change would raise, Kellyanne Conway, who is Mr. Trump’s White House counselor, said that it would ensure that “those who are closest to the people in need will be administering” the program. Since its creation in 1965, Medicaid has been an open-ended entitlement. If more people become eligible because of a recession, or if costs go up because of the use of expensive new medicines, states receive more federal money.

Among the uncertainties which would result from such a change are: How much money will each state receive? How will the initial allotments be adjusted — for population changes, for general inflation, for increases in medical prices, for the discovery of new drugs and treatments? Will the federal government require states to cover certain populations and services? Will states receive extra money if they have not expanded Medicaid eligibility under the Affordable Care Act, but decide to do so in the future?

A bipartisan group of governors raised issues like: “States would most likely make decisions based mainly on fiscal reasons rather than the health care needs of vulnerable populations.” “States should be given the ability to reduce Medicaid benefits or enrollment, to impose premiums” or other cost-sharing requirements on beneficiaries, and to reduce Medicaid spending in other ways. “Flexibility would really mean flexibility to cut critical services for our most vulnerable populations, including poor children, people with disabilities and seniors in need of nursing home and home-based care.”

Speaker Ryan indicated that House committees will mark up a reconciliation package in the next couple of weeks that will both repeal President Obama’s healthcare law and replace portions of it. Yes, portions of it. It will be a repeal with some replacement in it for what is able to be done given the reconciliation process. This does not do a lot to reduce uncertainty for state government. Of course, anything that causes state budget uncertainty leads to uncertainty for providers. There were already enough issues facing hospitals in 2017 that made the sector particularly credit vulnerable. This proposal simply ratchets up that uncertainty for investors and decreases the attractiveness of the sector even more.

WHILE OTHER GOVERNMENTS WILL FACE PRESSURE TOO

With all of the emphasis on the impact of block granting Medicaid on states, it is easy to forget that county governments pick up 25% of the cost of the program. In addition, New York City functions as one county in that regard as it picks up 25% of the Medicaid costs in the City. As the effective front line providers of Medicaid funding, counties had historically come under strain financially. In past decades, county health facilities serving those patient cohorts experienced extraordinary pressures leading to low liquidity, extra borrowing, and the need to sell or close hospital and other health facilities. These included not just smaller rural counties but major metropolitan counties like Erie in NY, Fulton in GA, Dade in FL, Cook in IL, and San Bernardino in CA.

New York City will find itself under pressure as the result of its unique position in the Medicaid funding chain. If block grants reflect reduced revenue, the City will have to find other sources of expense reduction to offset the burden. This will be more difficult than some might expect as the DeBlasio administration’s hiring spree has built in much more employee expense to the budget. We anticipate that the City’s ratings would come under pressure under those circumstances.

Thus, the proposed changes to Medicaid add additional worry to those investors who may have already soured on the GO sector. Added to pension and benefit pressures, Medicaid may become one more brick on a load that threatens to weaken the sector in general and some credits in particular.

NYC OUTLINES PRELIMINARY FY 2018 BUDGET

The Mayor released his latest Financial Plan Update and his preliminary look at the upcoming FY 2018 budget. This indicated several more potential headwinds for the City. Tax revenue growth is expected to slow to 2.4% in FY 2017 and improve moderately to 3.9% in FY 2018. Non-property taxes were flat in FY 2016 and are expected to grow 0.5% in FY 2017. Taxes from real estate transactions have declined nearly 15% in the first half of FY 2017 relative to the same period in FY 2016. In addition, the Plan makes certain assumptions that face difficulties in Albany. These include approval of the Governor’s college tuition plan and the extension of the highest tax bracket a.k.a. the Millionaire’s Tax.

Since the last Plan Update in November, the City projects reductions in reserves of $1.2 billion and unspecified savings of nearly $600 million in order to cover a projected gap of $2.6 billion in FY 2018. This in spite of projected annual growth in personal service cost expenditures of 5.5% over the next four years. Debt service is projected to increase 8% annually in support of a robust capital program. Bonded debt issuance is projected at $6.5 billion annually over 10 years. It is hard to see how that level of spending growth can be sustained. Should the Mayor not be reelected this November, his successor will be saddled with significant expense management issues.

These factors, in combination with the Medicaid issues noted in the prior section, make us cautious on the outlook for the City’s credit. Approximately 25% of budgeted revenues come from state and federal sources and both are subject to significant uncertainty. Should all of the headwinds we have mentioned to occur, it will take strong, timely, and decisive management to handle their impact and maintain the City’s fiscal position and ratings. Here, we think that the Mayor’s record to date does not inspire confidence.

SEC REMAINS ACTIVE DESPITE CHANGE IN ADMINISTRATION

The Securities and Exchange Commission announced fraud charges and an emergency asset freeze obtained against a businessman in South Carolina accused of siphoning funds he raised from investors for the purpose of purchasing or renovating senior housing facilities.

The SEC alleges that Dwayne Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings. The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama. From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.

“As alleged in our complaint, investors thought they were investing in a single senior housing project while their money was actually being used to fund an ever-expanding web of affiliated facilities and the personal expenses of Edwards and his friends and family,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, filed January 20 in federal district court in Newark, N.J., also charges Edwards’s former business partner Todd Barker, who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.

DEMOCRATS MOVE FORWARD ON INFRASTRUCTURE

Senate Democrats were to present their plan for a $1 trillion infrastructure plan. That plan dedicates $180 billion to rail and bus systems, $65 billion to ports, airports and waterways, $110 billion for water and sewer systems, $100 billion for energy infrastructure, and $20 billion for public and tribal lands. At the same time, the Republican leadership gave quite mixed signals regarding the timing of any infrastructure legislation. A major infrastructure package, initially had not been part of Ryan’s 200-day plan. But in recent days, Trump had personally asked Ryan to add it in. That said, healthcare and tax reform are farther along in the process and that could delay infrastructure legislation into the fall. Now some will be satisfied with enactment by year end.

States and localities are not waiting for federal action. There is some $3 billion of airport, highway, and mass transit bonds on the near term calendar. While Washington argues over the method of financing and identifying infrastructure, projects are moving forward reflecting the strong voter support for such spending shown at the polls in November from coast to coast. And they are using tax exempt bond proceeds to fund it which is something for the Congress to think about as they debate taxes and the tax exemption going forward.

RESPONSE TO PROMESA HIGHLIGHTS THE DIVIDE

The response of the incoming Rosello administration to PROMESA’s ideas about the way forward for Puerto Rico was quick to be received. It exposed the great divide between the various interested parties in the financial crisis. The Governor’s response was direct. ” It is my view, that any fiscal plan premised exclusively on a reduction in the health, well-being, and living standards of the People of Puerto Rico through healthcare delivery cutbacks, current retiree pension reductions of our most vulnerable segments of the population, and layoffs is by its nature unacceptable.” The Governor cited Executive Order No. 2017-001, which, among other cost reduction initiatives, (1) imposed a reduction of ten percent in government spending for the current fiscal year; (2) ordered a reduction of ten percent (10%) in professional service contracts, and a five percent (5%) decrease in utility spending for all government agencies and public corporations; and (3) mandates a twenty percent (20%) reduction in positions of trust in each agency and/or public corporation.

Two other orders require all agencies and public corporations to establish a Zero-Base Budgeting methodology as a way to reduce government spending and imposes a five percent (5%) reduction in purchases of goods in all government agencies. At the same time, the response set out clear areas of contention between the board and the government. Rosello was clear when he said ” we will not increase taxes on the poor and middle class. Instead, where opportune to spark economic growth we intend to reduce such personal income taxes. We seek to establish a comprehensive tax reform. We have already achieved a 10-year extension to the 4% excise tax of Act 154-2010. We will focus on increased collection rates of existing taxes through increased resources and improved processes and technology. We will achieve approximately $600 million in potential incremental revenues from effective collections of the SUT.”

“Currently, only 89,000 individuals file tax returns reflecting earnings in excess of $60,000. This represents only 2.5% of the population. A collaboration strategy with the IRS or global experts could help the Government assess the degree of tax evasion faced by the Commonwealth and will form the basis for new compliance strategies. As was our commitment, a permits reform will be proposed in the next two weeks. We will seek to increase SUT collections and level the playing field with local businesses by collecting taxes on internet retail sales. We will approve a new Incentives Code to rationalize tax incentives and only maintain the ones that produce a quantifiable return on investment. And we intend to overhaul and modernize municipal property tax and other taxes system to implement projected municipal subsidy reduction. We do not agree with a payroll-focused approach to right-sizing government.”

The position on healthcare and Medicaid may not be realistic. The letter states although additional ACA funding is not contemplated in your baseline assessment, we feel highly confident that we will convince the Congress of the grave challenges that our people will face if not granted parity in Medicaid and Medicare funding. There is no single political leader in the world that would want to be responsible for bearing the weight of endangering the health and wellbeing of 3.5 million of its citizens. Actually, there is. His name is Trump and he is willing to “endanger” the health and well being of some 20 – 30 million mainland Americans.

Other items include ” We will not limit access to higher education as a key enabler of social mobility and economic development. Plans for pensions would include reform of the various retirement systems, privatizing the defined contribution plans by liquidating the trust fund and transferring the assets to a 401 (k) program and honor the defined benefits plans with a PAYGo system.

As for the question of debt service, “we will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by PROMESA. We will continue to negotiate with the various creditor groups in good faith, respecting the rule of law, and based on a transparent and audited baseline. As we have agreed, the Government will lead the good faith negotiations with creditor groups with the Board’s collaboration. We will respect the priority of payments established in the various credits and we will establish alternative paths for various creditors, including the possible implementation of a mechanism to mitigate losses incurred by local resident investors.

Clearly the letter is not a blueprint for a swift resolution of this ongoing disaster. It clearly excludes a number of plausible and likely needed actions while further cementing the concept of debt reduction through less than full payment. We are troubled by the articulation of different standards for Puerto Rican versus non Puerto Rican debt holders. All in all the situation continues down its messy path.

Muni Credit News January 24, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

BEEN DOWN THIS ROAD BEFORE

WILL THE BLACK HOLE MOVE TO VEGAS?

PROMESA REPLIES TO THE NEW GOVERNMENT

FREE TUITION IS A SPREADING IDEA

LIPA NEARING WIND FARM AGREEMENT

_______________________________________________________________________

BEEN DOWN THIS ROAD BEFORE

A new Washington Post-ABC News poll of 1,005 respondents carried out from Jan. 12 to Jan. 15 showed that President Trump’s proposed reliance on tolls from revenue-producing infrastructure projects was not strongly supported. The tolling plan was strongly opposed by 44% of those polled and somewhat opposed by 22%. Only 11% said they strongly supported the Trump proposal and 18% were somewhat supportive. In a presentation to The United States Conference of Mayors VP-elect Pence said the new administration will work with city and state officials to fund infrastructure projects that deliver results. Trump’s experiences as a developer showed him the significant economic benefits that can result from large infrastructure projects, Pence said.

“Our president-elect believes, as I do, that the federal government can play a critical role in helping our cities thrive,” he said but, Trump last week appointed two well-known New York City developers to leadership of a panel that would oversee the nationwide infrastructure plan. Steven Roth of Vornado Realty and Richard LeFrak of LeFrak Organization have agreed to head up the infrastructure council, according to the Wall Street Journal. We note that Messers. Roth and LeFrak are well known builders of commercial and residential buildings but have no particular history with public infrastructure.

At the same time, Transportation Secretary-designate Elaine Chao tried to send more of a public funding oriented message when she said at her Senate confirmation hearing last week that Trump would be agreeable to more direct federal funding of state and local projects than is contained in the five-year Fixing America’s Surface Transportation Act adopted in 2015. according to House Speaker Paul Ryan, President-elect Donald Trump’s massive infrastructure package should have $40 of private-sector spending for every $1 of public spending by Ryan’s calculation.

Trump claims his plan would be revenue neutral thanks to taxes from new jobs and contractor profits. Ryan also confirms our concerns about what constitutes infrastructure. “That’s airports, that’s pipelines, that’s roads, that’s bridges, that’s harbors, that’s canals,” said Ryan when giving examples of proposed infrastructure. The President-elect ’s nominee to lead the Commerce Department, Wilbur Ross, told the Senate “The infrastructure paper I put out was meant to provide another tool, not to be the be all and end all.” “There will be some necessity for [direct federal spending on transportation], whether it’s in the form of guarantees or direct investment or whatever.”

We look at the whole scheme with great skepticism. The last two eras of huge infrastructure spending were federally funded to stimulate the economy (depression era spending programs) or as military programs (the start of the interstate highway system). Neither round was designed to be funded out of contractor profits. We remember more recently the experience when efforts were made to toll sections of Interstate 80 in Pennsylvania which were met with massive opposition from both long distance users but especially those residents for whom interstates effectively serve as local connectors between towns. “Tolling the interstates is a total non-starter,” said Chris Spear, president of American Trucking Associations. “It is toxic and we will fight it, tooth and nail. We need national connectivity and tolling is the worst type of approach.”

Virginia appears to be in the crosshairs of any initial effort to establish private infrastructure finance. The Trump transition team has asked Virginia for a list of potential transportation projects, including specific questions about projects that could include tolls, the state’s transportation secretary says. Virginia responded with a list of projects based on statewide priorities, ranging from the Port of Virginia to Interstate 81. Tellingly, the VDOT Secretary Layne’s response was qualified. “We’d be very happy to have more (projects). But quite frankly, it’s only a very small part of our projects because it’s going to require tolling,” Layne said.

Secretary Layne reinforced the notion that the incoming administration’s infrastructure proposal appears to be focused on $137 billion in tax credits for private companies who invest in return for revenue streams from the projects like tolling. As for the reliance on tax credits – “I think that’s actually a red herring, because most of these guys don’t need tax credits, because for the beginning years there is no taxable income,” Layne said.

“Most of the infrastructure needs in this country are rebuilding assets that aren’t putting in capacity. … You need a sustainable, multimodal, growing revenue source,” he said. “And so far, that hasn’t come out of the Congress and the Trump administration. Now, maybe repatriation of taxes will be that source; I don’t know.” Virginia has a backlog of projects including for additional VRE capacity on the Fredericksburg Line; fixes for Interstate 95 southbound at exit 126 onto Southpoint Parkway in Spotsylvania County; $1 million to help convert Columbia Pike in Arlington into a “smart corridor” that could increase transit convenience and use; changes for the intersection of Waxpool Road and Loudoun County Parkway; upgrades for Arcola Boulevard in Loudoun County; and a series of northern Virginia bike, bus and pedestrian projects.

WILL THE BLACK HOLE MOVE TO VEGAS?

The Oakland Raiders have made it official and applied to relocate to Las Vegas. The league, which has stridently avoided Las Vegas due to concerns about gambling-related issues, would require approval from at least 24 of the 32 teams, and the earliest the owners are expected to vote is late March. The request has come in the face of the explosive growth in daily fantasy sports and other forms of wagering. The N.F.L. is still wary of gambling and its potential influence on games, but players, coaches and some owners, unsurprisingly most notably Jerry Jones of the Dallas Cowboys are not.

The Raiders have said they want to move to Nevada because they have failed for years to find a replacement for their home, the Oakland-Alameda County Coliseum, one of the oldest and most decrepit stadiums in the league. Local government officials have said they cannot pay a large share of the bill for a new sports facility, something the Raiders have demanded. The Raiders would leave a city that already lost the team once, when it moved to Los Angeles in 1982 before returning in 1995. They have significant fan bases in both Northern and Southern California.

This would be the Raiders second recent attempt as they tried to leave Oakland last year but failed to persuade the owners of other teams to let them build a new stadium in Southern California with the Chargers, who last week announced their move from San Diego to Los Angeles. So the Raiders owner Mark Davis, who also had held meetings with officials in San Antonio, began meeting with lawmakers in Nevada, who ultimately agreed to contribute $750 million in hotel taxes to help pay for a domed stadium that Davis wants to build in Las Vegas.

Lawmakers and business leaders in Oakland can still come up with an alternative plan to keep the Raiders, but time is of the essence. The City Council voted last month to give Fortress, an investment group, 60 days to persuade the Raiders to consider a plan to build a new stadium in Oakland. There are significant questions as to whether Las Vegas can sustain an N.F.L. team, although with about 2.5 million residents, the metropolitan area is bigger than several others with N.F.L. teams, including Buffalo, Green Bay and New Orleans.

How Davis intends to pay for a stadium, could be problematic because the league prohibits owners from having direct interest in gambling establishments. Sheldon Adelson, a casino magnate and the chairman of the Las Vegas Sands Corporation, will reportedly pay $650 million for a share of the new stadium, which is projected to cost $1.9 billion. It is unclear, though, whether he also wants a share of the Raiders.

The N.F.L. owners’ stadium and finance committee was shown plans last week by the Raiders that included building a stadium without financial support from Adelson. Davis will be eligible to receive $200 million in financial aid from the league for stadium construction, and presumably can raise money through the sale of stadium naming rights and licenses to purchase season tickets. But he would also have to pay a relocation fee, which will run into the hundreds of millions of dollars.

Oddly enough, the team will play in Oakland for at least two more seasons while a stadium in Las Vegas is being built. At least that is built for pro football whereas the L.A. Chargers temporary home will be a 27,000 seat soccer stadium.

PROMESA REPLIES TO THE NEW GOVERNMENT

The Financial Oversight and Management Board for Puerto Rico, in a letter to the governor, outlines five areas that the Rosselló administration must include in its fiscal plan for the government to generate, between now and fiscal year 2019, additional revenue and/or savings totaling $4.5 billion a year – The five areas include “revenue enhancements” through adjustments to the island’s tax system and improvements in tax administration; “government right-sizing, efficiency and reduction”; reducing health care spending; reducing higher education spending; and “pension reform.”

According to the Board, the revised fiscal plan baseline released by the prior administration estimated that, unless significant fiscal and structural measures are implemented, the Government will have an annual average fiscal gap of $7.0 billion from fiscal year 2019 to fiscal year 2026. In the coming days, it expects to complete the engagement of a forensic accounting firm to: (1) validate the bridge between the Commonwealth’s last audited financial statements as of June 30, 2014 and the fiscal plan, and (2) provide an independent report on the total outstanding indebtedness for the Commonwealth by issuer, list of all debt issues by issuer, use of proceeds of each debt issuance, contractual debt service schedule and debt service currently in default.

Ominously for bondholders, the letter states that even with the immediate successful implementation of these measures the Implied Primary Surplus Available for Debt Service on fiscal year 2019—before taking into account any legacy deficits—is $0.8 billion, which represents only 21% of the contractual debt service of $3.9 billion for fiscal year 2019.

It acknowledges that “from your executive orders declaring a fiscal emergency, imposing salary freezes, limiting the number of non-career personnel and other labor cost reductions and requiring agencies to build zero-based budgets, it appears that your administration shares this priority [of achieving savings through government right-sizing and efficiency improvements.] . The Board recommends that the Government should consider taking the following actions: reducing non-personnel expenditure by at least 10% by re-negotiating large contracts, centralizing purchasing, and implementing other procurement best practices, such as clean sheeting and demand management, among others; reducing payroll costs by approximately 30% by substantially eliminating positions and making other reductions to total public labor compensation, including consolidating and significantly reducing non-essential Government services; eliminating municipal and private sector subsidies and ; right-sizing K-12 education expenditures to the current student population.

The fiscal board also tells the governor that it is “favorably inclined” to extend the deadline for submitting its fiscal plan to the board until Feb. 28, “such that the Board may certify the fiscal plan by no later than March 15, 2017.” The Oversight Board also tells Rosselló it is “favorably inclined” to extend Promesa’s automatic stay on litigation until May 1, “subject to the same conditions.”

So it is fairly clear what must be done. Now we will have a chance to see if the new administration is as serious as it said it was about realistically solving the island’s fiscal situation. The litigation stay is a two sided coin giving the new group some arguably necessary breathing room but nonetheless extending the level of patience required from bondholders from whom so much has been asked already.

FREE TUITION IS A SPREADING IDEA

Rhode Island Governor Raimondo has become the second Democratic governor this month to announce a plan to guarantee a college education. New York Gov. Andrew Cuomo was the first, with a $163 million proposal to cover tuition at New York’s public colleges and universities for in-state residents whose families earn no more than $125,000 a year.

Raimondo said her plan will cost $30 million a year and cover two years of free tuition at the Community College of Rhode Island (CCR), Rhode Island College(RIC) and the University of Rhode Island (URI). The idea, called the Rhode Island Promise Scholarship, doesn’t propose an income cap as New York’s does. Neither plan would cover room and board.

Students entering CCRI after graduating from high school would be eligible for two years of free tuition and waived mandatory fees, meaning they could earn an associate’s degree essentially without cost. Students at RIC and URI, four-year institutions, would be eligible for similar assistance during their junior and senior years, making their last two years essentially free. According to a study last year by LendEDU, a private group, recent RIC graduates left school with an average of $26,624 in loan debt, with URI graduates burdened by an average of $32,587. When all of the state’s public and private colleges were included, Rhode Island had the second-highest loan debt of any state. Only Connecticut was higher.

The Promise Scholarship program would be open to all resident students who enroll at a state college within six months of graduating high school or earning a GED prior to reaching the age of 19. Public, private and home-schooled graduates would all be eligible. There would be one scholarship per person. A student receiving assistance while at CCRI would not be eligible again after transferring to URI or RIC. Students would have to complete the Free Application for Federal Student Aid, or FAFSA. Federal Pell Grants and other such financial aid would be factored into the free-tuition calculation, lowering the state’s contribution. Students would be required to remain in good academic standing, with at least a 2.0 GPA. RIC and URI juniors and seniors would be required to have completed their sophomore year, having earned 60 credits and declared a major.

The program would cost $10 million in fiscal year 2018, $13 million in 2019, $18 million in 2020, with a projected annual cost of $30 million in 2021, when members of high school classes of 2017 will be seniors in college. Beginning this fall, tuition and mandatory fees are $4,564 at CCRI, $8,776 at RIC and $13,792 at URI. According to data cited by Raimondo’s deputy chief of staff, all Rhode Island high schools graduate a total of roughly 12,000 students every year.

LIPA NEARING WIND FARM AGREEMENT

And in New York, after years of stymied progress, the Long Island Power Authority has reached an agreement with Deepwater Wind, which built five turbines in the waters of Rhode Island , to drop a much larger farm — 15 turbines capable of running 50,000 average homes — into the ocean about 35 miles from Montauk. If approved by the utility board this week, the $1 billion installation could become the first of several in a 256-square-mile parcel, with room for as many as 200 turbines, that Deepwater is leasing from the federal government.

The Long Island site is part of a plan to meet Gov. Andrew M. Cuomo’s goal of drawing 50 percent of the state’s power from renewable sources by 2030. That includes developing 2.4 gigawatts of offshore wind, he said in his State of the State address this month, by far the nation’s highest target, equaling the capacity of the Niagara Falls hydroelectric generating station.

Executives have negotiated a contract that they expect the board to approve. Under it, LIPA will purchase all of the electricity delivered from the turbines by an underwater transmission line to a substation in East Hampton, paying a price comparable to what it would pay for other utility-scaled renewables like onshore wind and solar, according to the utility. Those prices have run around 16 cents a kilowatt-hour, higher than its average wholesale price of 7.5 cents.

Deepwater plans to finance the project with a mix of loans and equity investments, though it is unclear if it will be able to benefit from federal tax credits that have spurred investment in wind farms and helped reduce the price of the power they produce. Until this year, a federal investment tax credit worth 30 percent of the development cost could be claimed. That has dropped to 24 percent for projects that begin this year and is set to be phased out by the end of 2019. To qualify, the project would need to demonstrate construction activity by then, which could be open to interpretation by the Treasury Department. This seems like a better example of infrastructure under the Trumpian vision of tax credit based financing. It would also fit the Trump criteria of “big and shiny”.

Muni Credit News January 19, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

COVENANTS AND INVESTORS

ILLINOIS HOSPITALS FACE PROPERTY TAX THREAT

PR STORY JUST GETS WORSE

CBO REPORTS ON ACA REPEAL COSTS

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COVENANTS AND INVESTORS

With high yield money being drawn back to below investment grade tax-exempts, one can hope that a recent trend in the high grade corporate market translates to the municipal market. Investors recently stood fast on three investment-grade bond deals that tried to include more issuer-friendly terms. Most prominently, borrowers were forced language in new bond offerings that would have spared them from paying a make-whole premium in the event of a default (from a simple covenant breach to actual bankruptcy). The three borrowers were chipmaker Broadcom, auto lender General Motors Financial and Brazilian paper company Fibria. In addition, one junk-rated borrower, Novolex, removed similar language from a bond for its buyout from Carlyle this week.

The action came as Moody’s Investors Service says the covenant quality of North American high-yield bonds strengthened marginally in the final month of 2016. Moody’s Covenant Quality Index uses a five-point scale, in which 1.0 denotes the strongest covenant protections and 5.0, the weakest. The Covenant Quality Index (CQI), a three-month rolling average, strengthened to 4.19 in December from 4.20 in November, and in so doing moved out of weakest-level territory for the first time since April. Moody’s said “High-yield bond covenant protections are just above weakest level as we enter 2017.”

Make-whole premiums have long been a sought after term for corporate and corporate backed municipal investors. It allows them to recoup all the payments they expected when first buying the securities if those securities are redeemed early. They have appeared in natural gas prepurchase and military housing transactions. Last year some borrowers inserted language to prevent investors from demanding these payments if a company defaults. In times of low rates leading some to “chase yield”, borrowers push the envelope to see how much they can get away with. Two US court rulings last year appear to have changed market perception of what those limits may be when it comes to the premiums in question.

In a ruling against pawn shop operator Cash America, the court ordered the company to pay a make-whole premium to bondholders because the sale of the majority of a wholly owned subsidiary violated covenants in its bond indenture. Another court ruled in a case involving Energy Future Holdings ( a well-known name in the muni high yield market) that a company must pay a make-whole if notes are repaid in a bankruptcy.

Davis Polk has taken a position that investors have “traditionally understood” they are not due a make-whole premium when faced with a company’s default or bankruptcy. But, there is a distinction between events of defaults such as covenant breaches (in which case investors clearly do expect to be made whole) and actual bankruptcies (in which investors may have little choice but to accept losing money).

For the high yield muni market, an ability to fight for strong covenants is always in its interest. The average Moody’s scores for bonds rated Ba, single B and Caa/Ca were all weaker than 4.0. Now that rates have been trending upward, it is important that investors take advantage of whatever leverage they have.

ILLINOIS HOSPITALS FACE PROPERTY TAX THREAT

Hospital executives in Illinois recently argued before the state Supreme Court to maintain not-for-profits’ property tax exemption. The arguments were in a case brought by the city of Urbana and other taxing bodies who believe that a local hospital, Carle Foundation Hospital, should pay property taxes.

Illinois passed a law in 2012 exempting not-for-profit hospitals in the state from paying property taxes so long as the value of their charitable services was equal to or greater than their tax liabilities. But local governments say the state’s hospitals are profitable enough to exceed that test and therefore should contribute their share of taxes to help fund municipalities. The state constitution only allows such exemptions if the property in question is used exclusively for charitable purposes, they say. The attorneys for the taxing bodies in Illinois argue that the 2012 law goes beyond the constitutional statute by assigning a value to the exemption, which is that hospitals can be exempt if their charitable services are at, or exceed, the value of what it would pay in property taxes.

The challenge to the resulted in the Illinois 4th District Appellate Court last year ruling that the law was unconstitutional. In the state Supreme Court, some of the justices questioned whether the Illinois 4th District Appellate Court had the jurisdiction to consider the case. The justices also questioned whether they should instead on another upcoming case, Oswald v. Hamer, ruled the law exempting hospitals from paying property taxes as constitutional.

Charitable purposes has been interpreted to mean that hospitals provide care to patients regardless of their ability to pay. Carle argued that it’s charitable services far exceed what it would pay in yearly property taxes. Carle estimates that it paid some $20 million in property taxes from 2004 to 2011. Carle contends it provided $30.6 million in charity care in 2015, according to the hospital. The Illinois Health and Hospital Association filed an amicus brief in August 2016 supporting Carle Foundation as did the American Hospital Association on behalf of Carle.

There are approximately 150 not-for-profit hospitals in Illinois. A decision in the case is expected in coming months.

PR STORY JUST GETS WORSE

We’re not sure it helps but Gov. Ricardo Rosselló’s representative before the fiscal oversight board stated that the lack of payment between agencies and the “internal liquidity game” to claw back funds from certain government entities to correct general fund deficiencies hinder the process of certifying the government’s real deficit. So said the summary of the final transition report presented to a group of legislators and heads of agency at the Puerto Rico Convention Center. This has caused the deficit to range between $6 billion, as confirmed by the incoming Transition Committee, to more than $7 billion, as the Fiscal Oversight and Management Board established by the Promesa law claims.

If no action is taken to correct this and other governmental deficiencies, there could be a government shutdown and even a “total collapse” of the government, said the representative before the fiscal oversight board. He highlighted the lack of good data. “There is an indisputable reality: The Puerto Rico government’s numbers are still a great mystery…. I predict that if Puerto Rico does not make a dramatic adjustment in the coming months, it could experience a total collapse. If it does not make the corresponding adjustments, there could even be a [government] shutdown,” the incoming Transition Committee president said during a press conference Tuesday.

In addition to this situation, the report details other findings that will be sent to the Governor’s Office, the Office of the Comptroller and the Legislature should an in-depth investigation and corresponding action be decided on, Sánchez said. The official suggested that this final transition report will justify the public policies to be established during the government’s initial months—which include the controversial labor reform being decided on in the Legislature or the fiscal plan that the government must submit shortly.

“Everything that is not essential must be cut because the crisis is real. And what agencies will face is a challenge never seen before and maybe in a few weeks we will find out just how severe things could be here due to the negligent actions of the outgoing administration,” he said. In the absence of a protocol to define what is essential in the government. Sánchez said a group of attorneys was asked to discuss, together with the fiscal board, what will be defined as essential for the Rosselló administration. “The challenge falls on the current leadership to make budget adjustments, make whatever cuts are necessary to guarantee essential services, to guarantee public servants and to protect pensions that are in a very delicate situation today,” he said.

The findings include a deficit of more than $230 million at the Department of Education, primarily for failing to pay rent to the Public Buildings Authority, the more than $500 million owed by the Highway and Transportation Authority (HTA) to its suppliers and the more than $1.4 billion in losses over four years at the Puerto Rico Electric Power Authority (PREPA). In the case of the Government Development Bank (GDB) the situation is critical: “It does not have a treasury [division]. It does not have the capacity to operate as a bank,” Sánchez said. He added that after deposits were frozen through the Moratorium Law, the GDB is exposed to fines for also having frozen federal funds.

The report also questioned $6 million spent on the Energy Commission “without producing any benefits for the population.” There is a $1.9 billion deficit in the Infrastructure Financing Authority caused by the transfer of HTA debts—which had to be paid off with a multimillion-dollar bond issuance that never took place—and the Metropolitan Bus Authority has accumulated a deficit of more than $98 million. The Authority, however, acquired 25 new vehicles that do not feature handicap ramps or fare processors, Sánchez said.

Other findings criticized the lack of payment of the University of Puerto Rico’s (UPR) debt despite “having the funds” to do so and the investigations for alleged corruption in the Labor Development Administration and the Puerto Rico Aqueduct and Sewer Authority (PRASA) following the case of former Popular Democratic Party (PDP) fundraiser Anaudi Hernández. As for the Fire Department, 125 positions were appointed without having the $3.25 million needed to pay for them.

These kinds of details give additional credence to the narrative that Puerto Rico’s problems are more intractable than thought. They increase the pressure on creditors to relent and accept more onerous terms of restructuring than is already the case. This while building additional justification for the view that the situation reflects gross mismanagement and political failure for which the creditors could not be responsible.

CBO REPORTS ON ACA REPEAL COSTS

The Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) prepared at the request of the Senate Minority Leader, the Ranking Member of the Senate Committee on Finance, and the Ranking Member of the Senate Committee on Health, Education, Labor, and Pensions released its estimate of How Repealing Portions of the Affordable Care Act Would Affect Health Insurance Coverage and Premiums.

Here is some of what they said. “The number of people who are uninsured would increase by 18 million in the first new plan year following enactment of the bill. Later, after the elimination of the ACA’s expansion of Medicaid eligibility and of subsidies for insurance purchased through the ACA marketplaces, that number would increase to 27 million, and then to 32 million in 2026. That first year increase in the uninsured population would consist of about 10 million fewer people with coverage obtained in the nongroup market, roughly 5 million fewer people with coverage under Medicaid, and about 3 million fewer people with employment- based coverage.

The Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015, H.R. 3762 would make two primary sets of changes that would affect insurance coverage and premiums. First, upon enactment, the bill would eliminate penalties associated with the requirements that most people obtain health insurance (also known as the individual mandate) and that large employers offer their employees health insurance that meets specified standards (also known as the employer mandate). Second, beginning roughly two years after enactment, the bill would also eliminate the ACA’s expansion of Medicaid eligibility and the subsidies available to people who purchase health insurance through a marketplace established by the ACA.

H.R. 3762 also contains other provisions that would have smaller effects on coverage and premiums. Insurers who sell plans either through the marketplaces or directly to consumers are required to: provide specific benefits and amounts of coverage; not deny coverage or vary premiums because of an enrollee’s health status or limit coverage because of preexisting medical conditions; and vary premiums only on the basis of age, tobacco use, and geographic location.

Eliminating the penalty for not having health insurance would reduce enrollment and raise premiums in the nongroup market. Eliminating subsidies for insurance purchased through the market- places would have the same effects because it would result in a large price increase for many people. Not only would enrollment decline, but the people who would be most likely to remain enrolled would tend to be less healthy (and therefore more willing to pay higher premiums). Thus, average health care costs among the people retaining coverage would be higher, and insurers would have to raise premiums in the nongroup market to cover those higher costs. CBO and JCT expect that enrollment would continue to drop and premiums would continue to increase in each subsequent year.

After weighing the evidence from prior state-level reforms and input from experts and market participants, CBO and JCT estimate that about half of the nation’s population lives in areas that would have no insurer participating in the nongroup market in the first year after the repeal of the marketplace subsidies took effect, and that share would continue to increase, extending to about three-quarters of the population by 2026. That contraction of the market would most directly affect people without access to employment-based coverage or public health insurance.”

So those are nonpartisan facts. As individuals begin to absorb these facts, there has been an initial backlash. It has become clear to residents and clients of rural hospitals that their local institutions are directly and negatively impacted by repeal. The ACA expanded Medicaid to tens of thousands of previously uninsured patients, providing new revenue streams for rural hospitals, which often serve a poorer, sicker patient population. The law also created a program that allowed some of these facilities to buy prescription drugs at a discount. So repeal creates real problems.

For example in Pennsylvania, 625,000 people enrolled in the expanded Medicaid program. Close to 300,000 came from rural areas, according to the Hospital and Health System Association of Pennsylvania. As of October, about 42,700 of Fayette County PA’s residents had Medicaid, according to state data, an increase of about 8 percent from 39,460 in June 2015. (Pennsylvania’s Medicaid expansion took effect in January of that year.) That’s close to one-third of the county’s population.

So the potential for real impacts are apparent. Lack of coverage or the perception of lack of coverage will cause real problems for rural and community providers and the patients they serve. Republicans know this hence the emphasis even during the current confirmation process of the HHS secretary nominee by them that the implementation of the terms of repeal will be over an extended period. All this does is create great uncertainty and instability for the sector. This can only be negative for those institutions and their creditworthiness.