Category Archives: Municipal Bonds

Muni Credit News November 20, 2017

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Joseph Krist

Publisher

ISSUE OF THE WEEK

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

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

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

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PUERTO RICO HEARINGS REVEAL CONGRESSIONAL GAME PLAN

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

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

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

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

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

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

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

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

COULD SANTEE COOPER BECOME A REGULATED UTILITY?

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

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

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

RATING IMPACT OF HARVEY BECOMES CLEARER

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

CNP Utility District, TX (A1/NOO)

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

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

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

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

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

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

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

Kleinwood Municipal Utility District, TX (A2/NOO)

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

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

Montgomery County Municipal Utility District 46 (Aa3/NOO)

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

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

Oakmont Public Utility District, TX (A2/NOO)

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

Varner Creek Utility District, TX (Baa1/NOO)

DALLAS RATING AFFIRMED

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

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

ENJOY THANKSGIVING!

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

Disclaimer: The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column. The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice. Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News Week of September 5, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$922,300,000

CHICAGO BOARD OF EDUCATION

General Obligation Refunding Bonds

Moody’s: B3

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

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

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

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

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

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PUERTO RICO

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

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

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

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

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

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

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

COURT DECISION HURTS MISSISSIPPI SCHOOL DISTRICTS

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

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

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

OKLAHOMA BUDGET STRUGGLES CONTINUE

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

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

MORE GOVERNMENT AID FOR NUCLEAR GENERATION

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

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

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

MORE PRESSURE ON PUBLIC SCHOOLS

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

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

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

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

Muni Credit News Week of November 6, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

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

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

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

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

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

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

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

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

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

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

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

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

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INDIANA TOLL ROAD STUDY

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

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

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

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

CHICAGO BOARD OF ED OUTLOOK BENEFITS

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

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

MOVEMENT ON CHIP RENEWAL

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

Muni Credit News Week of October 30, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$737,000,000*

VIRGINIA SMALL BUSINESS FINANCING AUTHORITY

Tax-Exempt Senior Lien Private Activity Revenue Bonds (Transform 66 P3 Project)

Moody’s: Baa3

A long awaited private activity bond financing should hit the market this week from the Virginia Small Business Financing Authority. Proceeds of the PABs will be loaned to I-66 Express Mobility Partners LLC (the concessionaire) and will be used together with the proceeds of a $1.2 billion TIFIA loan to help finance the construction of the I-66 outside the beltway project. Construction on the project is expected to start later this year and December 31, 2022 is the expected project completion date.

The bonds are guaranteed by LLC members are unrated Ferrovial Agroman SA, Ferrovial Agroman International Ltd, Ferrovial Agroman US Corp, Allen Myers VA Inc. and Allan Myers, Inc.. The project includes a security package during construction including a $750 million performance bond which will be reduced to not less than 2.5% of the Design/Build (DB) price and effective for a warranty period of 5 years after project completion as well as a $750 million payment bond, which will be in effect until one year after project completion. The overall maximum aggregate liability of the Design Build Joint Venture (DBJV) towards the developer under the DB contract is limited to 50% of the contract price.

The PABs obtained a Baa3 rating from Moody’s. This was based on the high leverage of the project (debt/mile around $89 million), a back-loaded debt amortization profile, uncertainty around the future traffic profile over the long-term horizon of the concession and the potential for high volatility in revenues. Constraints to the rating include the fact that managed lanes are a relatively new asset class in the United States and there is very limited performance data in particular over a longer time period.

The project encompasses the I-66 outside the beltway managed lanes project along a 22 mile corridor on I-66 between US-29 at Gainesville, Virginia and I-495 (Capital Beltway) in Fairfax County, Virginia. I-66 Express Mobility Partners LLC has entered into a 50-year concession agreement in December 2016 with the Virginia Department of Transportation and will be responsible for the design, build, finance, maintenance and operation of two tolled express lanes in each direction and for the design, build and finance of three general purpose lanes in each direction and associated infrastructure, which will be operated and maintained by VDOT. I-66 Express Mobility Partners LLC, is the borrower and concessionaire and is wholly owned by I-66 Express Mobility Partners Holdings LLC. I-66 Express Mobility Partners Holdings LCC is owned by Cintra Global Ltd. (10%), Cintra Infrastructures SE (40%), Meridiam Infrastructure North America Fund II (26.7%), I-66 Blocker, LLC representing Dutch pension fund APG (13.3%) and John Laing Investment Limited (10%). The Design-Build joint venture comprises Ferrovial Agroman U.S. Corp. (70%) and Allan Myers Va, Inc. (30%). Operating activities will be self-performed by the consortium.

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PREPA RECOVERY HITS CONTRACTUAL JOLT

A contract between PREPA and a small independent contractor to provide services in the restoration of the Puerto Rican power grid. The contract has a value of $300 million. PREPA and Whitefish signed the deal with no competitive bidding process in late September, despite Whitefish having only two employees at the time and little history working on infrastructure repair. Puerto Rico officials say Whitefish won the contract because it didn’t require a deposit the island couldn’t afford.

“The size and terms of the contract, as well as the circumstances surrounding the contract’s formation, raise questions regarding PREPA’s standard contract awarding procedures,” according to the chairman of the House Energy and Commerce Committee. Among the questions are the legality of provisions including one that provides that “In no event shall PREPA, the Commonwealth of Puerto Rico, the FEMA Administrator, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit elements.”

An Energy and Commerce hearing on the administration’s approach to recovery efforts will be held this week, giving lawmakers the chance to probe the Whitefish contract and more general issues, including the slow pace of repairs on the island. As those hearings approach, the governor of Puerto Rico has asked the management of PREPA to void the contract which FEMA did not approve.

The process continues PREPA’s streak of management errors that left the utility poorly prepared for a natural disaster let alone one of this scale. Now its lack of managerial acumen threatens to shove the recovery off track

HOW A MULTIFAMILY HOUSING BOND GOES GREEN

The NYS Housing Finance Agency has enacted new requirements for projects it finances such that they qualify for “green bond ” financing. All new construction projects must meet the U.S. Environmental Protection Agency (EPA) Energy Star Programs standards to enable projects to be Climate Bond Certified as Green Bonds, using criteria established by the Climate Bond Initiative (CBI).

New construction projects must also select one or both of these two programs: Enterprise Green Communities Criteria or NYSERDA Low-Rise New Construction Program or Multifamily New Construction Program. As an alternative to these two programs, HFA may choose to approve projects that prefer to implement standards of one of the nationally recognized leaders in the sustainability and energy efficiency industry such as the Passive House Institute US (PHIUS) or Passive House Institute (PHI); National Green Building Standard; Leadership in Energy and Environmental Design (LEED).

Applicants must document that project meets the rigorous CBI criteria for low carbon emissions. Applications must include signed contracts with qualified energy consultants to certify that the criteria of selected standards will be met.

Now the Agency is positioned to issue some $115 million of green bonds to finance the construction of three multifamily housing projects in the State. Two of the projects are in Brooklyn and one is in Suffolk County on Long island. The bonds will be issued under the Agency’s Affordable Housing Bond resolution which secures bonds from repayments on its portfolio of geographically diverse project mortgage loans, credit facilities, and debt service reserve funds.

So the bonds represent a proven credit of long standing but by establishing standards and procedures for compliance, allow the agency to access an expanding class of socially and/or environmentally responsible investors. And so the municipal bond market continues to evolve.

SALT RIVER PROJECT LITIGATION

In June, a US Court dismissed for lack of jurisdiction an interlocutory appeal from the district court’s order denying the Salt River Project Agricultural Improvement and Power District’s motion to dismiss SolarCity Corporation’s antitrust lawsuit based on the state-action immunity doctrine, the panel held that the collateral-order doctrine does not allow an immediate appeal of an order denying a dismissal motion based on state-action immunity.

Now the District plans to market its first issue of revenue bonds since that setback in the anti-trust case.

Solar-panel supplier SolarCity Corporation filed a federal antitrust lawsuit against the Salt River Project Agricultural Improvement and Power District (the Power District), alleging that the Power District had attempted to entrench its monopoly by setting prices that disfavored solar- power providers. The Power District moved to dismiss the complaint based on the state-action immunity doctrine. That doctrine insulates states, and in some instances their subdivisions, from federal antitrust liability when they regulate prices in a local industry or otherwise limit competition, as long as they are acting as states in doing so. The district court denied the motion, and the Power District appealed. The Circuit Court joined the Fourth and Sixth Circuits in holding that the collateral-order doctrine does not allow an immediate appeal of an order denying a dismissal motion based on state-action immunity.

So what is the issue for Salt River? SolarCity sells and leases rooftop solar-energy panels. These solar panels allow its customers to reduce but not eliminate the amount of electricity they buy from other sources. Many SolarCity customers and prospective customers live near Phoenix, Arizona, where the Power District is the only supplier of traditional electrical power. Allegedly to prevent SolarCity from installing more panels, the Power District changed its rates. Under the new pricing structure, any customer who obtains power from his own system must pay a prohibitively large penalty. As a result, SolarCity claims, solar panel retailers received ninety-six percent fewer applications for new solar-panel systems in the Power District’s territory after the new rates took effect.

Clearly Salt River sees Solar City as an economic threat. As a political subdivision of the State of Arizona, the District argues that it has authority to set prices under Arizona law and so is immune from federal antitrust lawsuits. The district court denied the motion, citing uncertainties about the specifics of the Power District’s state-law authority and business. The district court also decided not to certify an interlocutory appeal, but the Power District appealed nonetheless. The District is appealing this particular provision of a more expansive proceeding in which a “final decision” has not been issued by the District Court. The Power District argues that an interlocutory order denying state-action immunity is immediately appealable under the collateral-order doctrine.

Salt River is concerned that the ongoing litigation could, among other things make it more difficult for the District to finance its operations as it attempts to deal with a rapidly changing environment for generators and distributors of electric power. On one front, Salt River has been on the progressive dynamic side of the overall issue through its agreement to close the 2.25 MW Navajo Generating Plant, a coal fired facility due to unfavorable plant economics. On this other front, Salt River faces an independent provider of solar based electricity which would be expected to substantially reduce demand for power from Salt River. This would be a credit negative for salt River in that it would be forced to spread its fixed cost base over a much smaller number of customers. Hence, the effort to “discourage” solar City’s efforts to provide power.

Now the District is seeking to market its first bond issue after this decision. S&P has decided that it is maintaining its AA stable rating on the District’s $3.7 billion of debt. S&P cites the fact that SRP’s residential customers accounted for about 50% of 2017 retail revenues, which we view as contributing to revenue stream stability. Electric retail revenues represented 90% of fiscal 2017 operating revenues. Its ability to raise rates on an unregulated basis and good debt service ratios are cited to support a cap on the rating level rather than any negative outlook due to what it calls ” uncertainties emissions regulations and their related compliance costs present.” The legal threat to the Phoenix retail base was not referenced.

We think that when an entity reacts to something like a change in technology and goes for the no-competitive practices grenade, they are letting us know that the threat is at least somewhat existential. We’re not saying that it’s a non-investment grade credit but some negative action – at least in outlook pending the results of the litigation – is warranted. Not the rating agencies best moment.

ILLINOIS TEACHERS RETIREMENT FUND NOT QUITE TREADING WATER

The IL Teachers’ Retirement System investments generated a positive 12.6 percent rate of return, net of fees, during fiscal year 2017 – a return that exceeded the System’s custom investment benchmark of 11.4 percent. TRS ended FY 2017 on June 30 with $49.4 billion in assets. Gross of fees, the TRS return for FY 2017 was 13.3 percent. Total investment income, net of fees, was $5.5 billion. The 30-year investment return for TRS currently is 8.1 percent, net of fees, which exceeds the System’s long-term investment goal of 7 percent.

Before we break out the bubbly we note that while the System’s funded status improved modestly during FY 2017 from 39.8 percent to 40.2 percent, the unfunded liability increased. At the end of the fiscal year the unfunded liability was $73.4 billion, compared to $71.4 billion at the end of FY 2016. The System’s three-year return at the end of FY 2017 came in at 6.1 percent, matching the System’s custom benchmark. The TRS five-year average of 9.9 percent at the end of the last fiscal year exceeded the benchmark of 9.3 percent. The 10-year average for FY 2017 of 5.4 percent barely topped the custom benchmark of 5.3 percent.

Muni Credit News Week of October 23, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

RECREATION BONDS LIVE

Forty years after his death, the life and legacy of Elvis Presley still maintain a hold on a substantial number of Americans. While many different images of Elvis live on in the collective memory of Americans, it isn’t likely that many of those memories involve municipal bonds. That may be about to change.

The Economic Growth Engine Industrial development Board of Shelby County, Tennessee is circulating a Limited Offering Memorandum in support of a proposed issue of $39,610,000 of unrated tax increment revenue bonds to support the expansion of “attraction” space at Graceland, the world famous former home of Elvis Presley.

The bonds would be paid from three sources: 50% of all incremental real and personal property taxes collected from the project area through January 1, 2034; a portion of all state and local sales taxes generated in the project area through June 30, 2045; and proceeds of a 5% sales tax surcharge generated from the project area through April 30, 2045.

The entire “Graceland Campus” as it is now known covers 120 acres and includes not only the home but a variety of entertainment, retail, and hospitality facilities. This project would develop some 220,000 square feet of additional retail, entertainment, and support space which are being undertaken in association with plans to run tours from a regional area defined as a five hour driving radius from Memphis.

There is nothing particularly new or innovative about the security or financing structure of the deal. The risks associated with it are the standard risks of development and operation of the project and the risk that demand will not be commensurate with the levels projected in sizing the bond issue. We do not pretend to make any judgments about the viability of the projections of visitors and/or spending. We realize that the attraction and the personality and image on which it is based are unique and arguably have worldwide appeal.

What is of interest here is the fact that the deal is being undertaken despite years of political attack on the need for and usefulness of tax exempt financing for municipalities even if they involve basic infrastructure facilities of unquestioned public value. We just question whether the proposed use of the tax-exemption to finance clearly (except to die hard Elvis acolytes) non-essential private facilities meets the test of best and highest use of the tax exempt financing exception. At a time of unquestioned shortfalls in infrastructure financing nationwide, we find the proposed transaction extremely difficult to justify under most flexible interpretation.

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SEC INVESTIGATING SUMNER NUCLEAR PLANT

SCANA Corporation (SCANA) (NYSE:SCG) announced that SCANA and its subsidiaries have been served with a document subpoena issued by the staff of the Securities and Exchange Commission in connection with an investigation they are conducting relating to the new nuclear project at V. C. Summer Nuclear Station. The Company intends to fully cooperate with the investigation. SCANA was the investor owned utility partner of the South Carolina Public Service Company (Santee Cooper) in the recently cancelled project. It is not clear what the focus of the Commission’s request is and there is no indication as of yet that Santee Cooper is under investigation.

STARBUCKS’ MUNI BOND JOLT

Starbucks Corp. will create 100 new jobs and invest $120 million in expanding the company’s coffee roasting facility in Augusta. The new roasting operation will add 140,000 square feet onto the existing facility in the Augusta Corporate Park in Richmond County. The expansion is expected to be completed by the end of 2018 and is part of the company’s plan to create more than 68,000 new jobs in the U.S. by 2021.

Starbucks opened its Augusta plant in 2012, making it the company’s fifth manufacturing facility in the U.S. and the company’s first owned and operated facility in the world to produce soluble products. The facility prepares and packages ingredients and finished products for most of the company’s soluble-based beverages for all of North America and parts of Europe.

The Augusta Georgia Economic Development Authority has just approved a $130 million industrial development bond issue. It has already set aside property in the city to accommodate the proposed facility expansion.

MOODY’S EXPECTS HARTFORD DEFAULT

On Friday, October 19, Moody’s announced that the City of Hartford (Caa3 negative) is likely to default on its debt as early as November without additional concessions from the State of Connecticut (A1 stable), bondholders and labor unions. Its analysis projects operating deficits of $60 million to $80 million per year through 2036, the final maturity of its general obligation debt. Moody’s estimates that fixed costs — including pension contributions, benefits and insurance, and debt service — are driving large projected operating deficits of approximately 11% of revenues.

Moody’s asserted that “one option is the state fully funding the existing payments in lieu of taxes formula, which has been underfunded for years; fully funding the payments in lieu of taxes (PILOT) formula would provide the city with $52.3 million of additional revenue each year.”

DETROIT ON THE ROAD BACK

Three weeks before election day, Moody’s Investors Service has upgraded the City of Detroit, MI’s issuer rating to B1 from B2. According to Moody’s, ” t he upgrade to B1 reflects improved fund balance and liquidity coupled with adoption of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions. The rating also considers the very conservative fiscal approach of Detroit’s current administration as well as the city’s current economic performance, which is strong considering its historic contraction. The rating still weighs these credit strengths against long-term risks arising from high unfunded pensions and economic vulnerabilities tied to a weak socioeconomic profile and low industrial diversity. The rating further acknowledges that maintenance of healthy reserves and budgetary capacity to fund rising fixed cost demands is highly dependent on continued revenue growth.”

As for its positive outlook assignment, Moody’s said ” the positive outlook reflects the possibility of further upward movement in Detroit’s rating in the event current economic and financial trends persist. Sustained growth in revenue that enhances the city’s capacity to fund its long-term obligations will positively impact the city’s credit profile.”

TOLLING IN INDIANA TAKES STEP FORWARD

The Indiana Department of Transportation is taking the next step toward instituting tolling on interstate highways by requesting proposals from firms interested in developing a strategic plan and doing other preparatory planning. INDOT posted a request for proposals, or RFP, to do the work on Tuesday. The agency expects to select a firm by Jan. 26.

Five corridors are under consideration by the State for tolling: I-94 from Illinois to Michigan; I-65 from I-90 south to I-465 and then south from I-465 to the Ohio River; and I-70 from the Illinois state line to I-465, then from I-465 to the Ohio state line. It is also considering tolling in Indianapolis.

The RFP requires the selected firm to determine what environmental studies will be necessary to comply with the National Environmental Policy Act, and to develop the methodologies to accomplish them. It also must perform traffic, environmental justice and other studies associated with NEPA studies.

MORE BAD NEWS FOR NY METRO RAIL INFRASTRUCTURE

Construction work on a critical project to repair damage from Superstorm Sandy in East River tunnels used mostly by the Long Island Rail Road may not begin until 2025. The work, once expected to begin by 2019, now will cost more than $1 billion — three times original estimates, according to Amtrak. It will also require the LIRR to operate without one of four East River tunnels linking Long Island to Penn Station for up to four years.

Amtrak has opted for a “full reconstruction” of the tunnels — a complex project that requires years of design work and other preparations. That includes fortifying the other two East River tunnels not damaged by Sandy so they can be as reliable as possible while the other two tubes are offline. It intends to wait until the railroad begins running some trains to Grand Central Terminal as part of the Metropolitan Transportation Authority’s East Side Access project. That project, which has been besieged by delays since it was proposed in the 1990s, is scheduled to be completed by late 2022. But it has fallen further behind in recent months, and the MTA has blamed Amtrak for not scheduling construction at the Harold Interlocking, just east of the tunnels, used by both railroads.

CHICAGO BUDGET WOULD RAISE TAXES AGAIN

The financial pain continues for Chicago’s strained finances. The budget proposed for 2018 by Chicago Mayor Rahm Emmanuel includes a rise in taxes for the sixth time in seven years. The budget would raise the city’s 911 phone tax for the second time in four years to balance the budget, raise taxes on ride-sharing services like Uber and Lyft to pay for CTA upgrades and increase the amusement tax for concerts at larger venues while eliminating them at smaller theaters. Chicago property owners next year already face a previously approved water and sewer tax increase and a $63 million city property tax increase, the fourth and final consecutive annual hike in that levy approved in 2015 to dramatically increase pension contributions. That doesn’t include a separate Chicago Public Schools property tax increase of $224.5 million.

The $8.6 billion plan would spend about $289 million more than this year. The 911 tax would go up $1.10 a month, while fees would rise 15 cents on Uber and Lyft rides. The previously approved CPS and city property tax increases are expected to cost the owner of a $250,000 home an additional $230 per year. It is offset in part, by a newly increased homeowners exemption from state lawmakers in August that city officials estimate would lower the bill on a $250,000 home by about $148 next year.

The phone tax increase would add $30 million to the city’s revenues, and city officials have said $11 million of it would go toward a required modernization of the 911 system, allowing it to receive text messages and photos that can be relayed to emergency responders. Police overtime continues to increase. The city budgeted for $78 million this year, but by the end of July it already had topped $95 million.

Muni Credit News Week of October 16, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$104,500,000

THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF ST. LOUIS, MISSOURI

DEVELOPMENT FINANCING REVENUE BONDS

(BALLPARK VILLAGE DEVELOPMENT PROJECT)

This non-rated bond issue will provide the financing for the expansion of the Ballpark Village mixed use retail, entertainment, and residential project that has been being developed across the street from Busch Stadium, the home of Major League Baseball’s Saint Louis Cardinals. The Cardinals have long been one of the most regionally supported baseball teams due to their pre-1958 status as the western most located major league baseball franchise and the broadcast of their games to some 40 states over legendary radio station KMOX. This has created a large and loyal fan base which is known to travel significant distances to see the team play.

The development seeks to capitalize on the team’s role as the City’s leading sports attraction as well as the unique attendance characteristics of its disperse fan base. This is seen as generating a higher than usual demand for retail and entertainment product as a part of the overall fan experience. This is supported by the changing nature of demand for an experience which extends beyond the game itself.

The facilities are expected to produce revenue to support infrastructure needed for development through the collection of sales taxes generated within the area. Two entities – a Community Improvement District authorized to collect a sales and use tax of 1% on activities within its boundaries and a Transportation Development District also authorized to collect its own 1% sales tax – are designed to generate the revenues pledged to the repayment of the Bonds.

Also pledged to the payment of the Bonds are all payments from the District paid in the form of payments in lieu of taxes or PILOTs. There are also pledged 50% of so-called economic activity taxes or EATs. Additional pledged revenues include 25% of revenues collected by the City of St. Louis (e.g. city sales taxes) excluding hotel taxes. These revenues are subject to appropriation. The State of Missouri has also pledged a portion of State sales and Income Tax collected from activities within the Districts.

Clearly, the complex security structure as well as the underlying project concept stand out within the municipal bond space. While many stadium projects are advertised as engines of economic development, this may be one of the clearest and most developed concepts to result from stadium development to date.

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KANSAS COURT MAINTAINS PRESSURE ON THE STATE

The Brownback era may be over in Kansas but trail of wreckage to the State’s fiscal position remains. The Kansas Supreme Court has given a thumbs down to the $488 million of school funding added by Senate Bill 19 for the current biennium. The court gave the state until April 30 to present an adequate funding plan. Under the ruling the state can review and make necessary adjustments to its current budget to address the court decision.

The unanimous ruling was based on a number of factors. The spending plan included funding to some districts to cover the costs of absorbing lower income children into their schools yet some of those districts received funds to serve more children from low-income families than those districts actually enroll. The state argued that districts with a low percentage of children from low-income backgrounds still have their share of kids who are struggling academically. Hence, they should get a cushion of extra funding to serve those academically struggling kids.

The Court disagreed with the selective provision of that funding instead taking the view that all districts in the state should receive funding on that basis. Revisions to school finance laws, allowed some districts to enlarge one part of their budgets that comes primarily from local taxpayers — without approval from those taxpayers. The Legislature later closed this window and grandfathered in those districts.

The Court found that this denies the rest of the state’s schools equal access to funding. This spring lawmakers wanted school districts to start paying their utilities and some of their insurance bills with a specific local property tax fund that is otherwise meant for things like building construction and computer purchases. A key feature of this fund is that the amount of money poorer and richer school districts have in it varies. The Court disagreed.

Another change in state law caused the State to change how it calculates some of the money it gives to poorer districts. Instead of taking into account current data from local school budgets, it decided to start using data from a year earlier. The state argued this offers budget stability and predictability. Those changes cut an estimated $16 million from the state’s aid to schools in 2017-18 — savings that come from reducing payments to districts with weaker tax bases.

The concept underlying all of these issues is equality of treatment for all school districts. The Court wants the Legislature to put effort into figuring out what amount is needed and then show the court how it came up with it. And the court wants reasoning and calculations that make sense. The court calls this “showing your work.” The Legislature offered up a four-page statistical analysis of how much money schools need in order to be successful. The justices devoted some 14 pages to criticizing weak documentation, methodology and reasoning.

Two prior school finance studies the Legislature commissioned in took analysts at least half a year to complete. One resulted in more than 340 pages of analysis and supporting documentation. The other had more than 160 pages.

The ruling was anticipated when the budget was adopted and was seen by outside observers as a huge risk to the State’s budget and credit. Nevertheless, the legislature went ahead and challenged the Court to find in favor of the plaintiffs. Now that the legal process has effectively been fully tested, the Legislature must address the issues raised by the Court while also addressing the State’s weakened budget position and outlook.

SANCTUARY CITIES CHALLENGED BY DOJ

Attorney General Jeff Sessions announced Chicago, New Orleans, New York and Philadelphia were all determined to have “laws, policies or practices” that violated a federal statute that requires jurisdictions to comply with federal immigration officials and help to deport suspected undocumented immigrants held in local jails. The department sent the letters on Wednesday to the four cities as well as Cook County, Illinois, which includes Chicago and its sprawling suburbs.

Each jurisdiction has until Oct. 27 to demonstrate they do not have policies in place that restrict law enforcement officers and city employees from fully cooperating with federal immigration officers. The department cleared four other jurisdictions – Milwaukee County, Wisconsin, Clark County, Nevada, the State of Connecticut, and Miami-Dade County, Florida .stating that they did not violate the federal statute.

DOJ would seek to withhold Edward Byrne Memorial Justice Assistance (JAG) Grant Program funding from the cited jurisdictions. The program is the primary provider of federal criminal justice funding to state and local jurisdictions. The Byrne JAG Program is administered by the U.S. Department of Justice, Office of Justice Programs and was created in 2005 by merging the Edward Byrne Memorial Grant Program (Byrne) with the Local Law Enforcement Block Grant Program (LLEBG). Byrne JAG funding can be used to support a broad range of state and local government projects, including those designed to prevent and control crime and to improve the criminal justice system.

According to the National Criminal Justice Association, under current law, Congress is authorized to spend up to $1.095 billion per year for the Byrne JAG grant program. In practice, however, annual funding has not reached that level in over a decade. In FY02 and FY03, Byrne and LLEBG funding (see Byrne JAG History above) together totaled $900 million. In FY05, the first year of the combined Byrne JAG program, funding dropped to $536 million (after subtracting unrelated carve-outs). In FY06, funding dipped further to $322 million and then rose again to $520 million in FY07. In FY08, although both the House and Senate Appropriations Committees had recommended significantly increased funding in their committee-passed bills, funding in the final conference report was cut by two-thirds to $170 million.

In FY13, the justice assistance grant programs and all other projects and programs funded by the defense and non-defense discretionary portions of the budget were subject to automatic across the board cuts, called sequestration, as required by the Budget Control Act of 2011. The final FY13 appropriations bill increased funding for the Byrne JAG formula program by 5 percent, from $352 million to $371 million, which was then reduced by the sequester to $352 million. Therefore, final FY13 funding for Byrne JAG was funded at the FY12 level. Funding dropped again in FY14 to $344 million and in FY15 to $333 million. In FY16, funding was bumped up to $347 million.

HOSPITALS TAKE ANOTHER HIT

With two executive decisions, President Donald Trump launched two more missles at the finances of healthcare providers. The first was the decision to eliminate cost sharing reduction (CSR) payments, on a monthly basis to compensate insurance companies who offer subsidies to low income purchasers of health insurance through the ACA marketplaces. The federal cost is estimated at $7 billion annually. While courts have determined that the payments are not supported by statute, there has been a clear consensus among insurers, providers, and politicians that the payments had a key role in stabilizing state marketplaces. The CBO also said halting the payments would increase the federal deficit by $194 billion through 2026.

The second was the decision to allow the purchase of insurance by allowing small businesses to band together and buy insurance through entities known as association health plans, which could be created by business and professional groups. Historically, the plans were not subject to state regulations that required insurers to have adequate financial resources, some became insolvent, leaving people with unpaid medical bills. Some insurers were accused of fraud, telling customers that the plans were more comprehensive than they were. They will be permitted to cover a far less extensive range of conditions and will not be required to cover preexisting conditions.

The changes are being made under a broader interpretation of federal law — the Employee Retirement Income Security Act of 1974 — “could potentially allow employers in the same line of business anywhere in the country to join together to offer health care coverage to their employees.” So said the White House. The Congressional Budget Office (CBO) said in August that about 1 million people would be uninsured in 2018 and insurance companies would raise premium prices by about 20 percent for ACA plans if the payments were cut off.

The executive order largely does not make changes itself; rather it directs agencies to issue new regulations or guidance. Those new rules will go through a notice and comment period that could take months. New York and California have already said that they will challenge the order in the courts. This could mitigate the impact on rates in 2018 but the outlook for 2019 is highly uncertain absent Congressional action.

BUT SOME SURVIVE THE ASSAULT

In the midst of the failure to renew the CHIP program and the action to undermine the ACA, some hospital credits withstand the pressure. Last Thursday, S&P announced that it had raised its long-term rating to ‘A+’ from ‘A-‘ on the California Health Facilities Financing Authority’s for Children’s Hospital of Orange County (CHOC). The outlook is stable.

S&P cited the “view of CHOC’s growing volumes and sharply improved balance sheet, coupled with increased operating income and cash flow over the past year generating over 4x maximum annual debt service (MADS) coverage.”

Muni Credit News Week of October 9, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

NORTH TEXAS TOLLWAY

$1,792,905,000 System Revenue and Refunding Bonds First Tier Bonds

Moody’s: “A1” S&P: “A”

$776,590,000 System Revenue and Refunding Bonds Second Tier Bonds

Moody’s: “A2” S&P: “A-”

In a somewhat abbreviated week, these two issues dominate the new issue calendar. The NTTA manages an established multi-asset tollway system in the Dallas-Fort Worth MSA. Assets include two bridges; one tunnel and four highways, approximately 150 miles in length and with 745 lane miles. Traffic is predominantly two axle passenger cars with only 2.4% multi-axle vehicles. The NTTA bonds are secured by net system revenues, with first tier having a priority claim, followed by the second tier and the Capital Investment Fund (CIF) bonds that are secured only by balances in the CIF.

A rate covenant in the amended and restated trust agreement dated April 1, 2008 requires net revenues to provide at least 1.35 times coverage of first tier debt service requirements, 1.2 times coverage of outstanding first tier and second tier debt service, and 1.0 times coverage of all outstanding obligations. The first tier bonds are additionally secured by a DSRF equal to average annual debt service the and second tier equal to one-half of average annual debt service.

The Moody’s ratings are based on NTTA’s essential roadway network located in one of the fastest growing US service areas. Moody’s projects that they will produce strong revenue growth from continued traffic growth and automatic biennial toll increases. Debt service coverage ratios over the next five years are expected to be consistent with its A1 rated peers, however leverage will remain elevated over the period. NTTA’s ability to fund its five-year growth needs without additional debt and minimal reduction in liquidity additionally supports the rating. The A2 rating on the second tier obligations reflect payment of debt service made after first tier debt and a relatively weaker debt service reserve fund that is cash funded at half of average annual debt service requirements.

The S&P rating on the first-tier bonds reflects its view of the region’s economic strength, with significant development along the corridors where the NTTA’s roads are located. These strengths are offset by the S&P view of the NTTA’s highly leveraged system of toll facilities that requires continuous revenue growth to meet its financial forecast. The ‘A-‘ rating on the second-tier bonds reflects S&P’s view of their subordinate status.

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PUERTO RICO CAUGHT IN TRUMP’S IGNORANCE

Bondholders got caught in another hurricane of sorts when President Trump made a few incredibly ignorant remarks about Puerto Rico’s debt. Upon his return from a very quick trip to the Commonwealth, the President stated the following: “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out. You can say goodbye to that.” “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.” Prices on the Commonwealth’s uninsured debt tanked into the low $30 range and the equity of bond insurers also took a significant hit.

The fact that OMB Director Mick Mulvaney tried to walk back the statements did not enhance the discussion. “I wouldn’t take it word for word with that,” OMB Director Mick Mulvaney said on CNN. “We are not going to deal right now with those fundamental difficulties that Puerto Rico had before the storm.” Added Mulvaney: “Puerto Rico’s going to have to figure out how to fix the errors that it’s made for the last generation on its own finances.”

The statement from the President showed a real ignorance of the situation and a lack of interest in policy and programmatic details that have characterized his Administration. They did encourage others who subscribe to the view that Puerto Rico’s debt should be forgiven. Disappointingly, these include representatives of some larger players in the market. Perhaps it is their own realization that they for so long enabled a series of Commonwealth administrations to conduct their finances recklessly and do so under the cover of inadequate disclosure.

In the meantime, the legal process to determine the legitimacy of Puerto Rico’s debt and the ultimate positions of the various debt holders continues. To make comments of the sort that the President indulged in before those processes have run their course is a disservice to all municipal bond market participants. It also shows real disregard for the many individuals who hold the triple tax exempt debt directly or through mutual fund proxies.

An intervention that absolves Puerto Rico of a significant segment of its debt obligations would have significance for the entire market. Municipal bonds are by and large secured by not just legal (constitutional and statutory) but moral obligations and these have allowed borrowers to access the public markets under very favorable comparative terms. In exchange, they have been granted access to bankruptcy and debt repudiation under only the most limited of circumstances compared to other classes of borrowers. It is what separates the municipal market from other markets such as the ones that the Trump family have so successfully used to their advantage when they mismanaged their businesses.

So we have real trouble with the Presidents latest fulminations. We are also troubled by a fairly weak response from the Administration’s senior economic and finance advisors. To allow these sorts of remarks to negatively impact a market as large ($3.5 trillion) and diverse that is so vital to the provision of basic capital based services is the height of irresponsibility.

WILL PROMESA BE SUPPORTED?

The President’s “casual” remarks about Puerto Rico’s debt come as the financial control board is seeking help from the US Congress. the board asked for quick federal action, including the authorization of a short-term, low-interest loan to keep Puerto Rico’s government functioning. The board urged “the maximum federal assistance to Puerto Rico to help it respond to and to recover from Hurricanes Irma and Maria.”

“This federal assistance should come in the form of grants and reimbursements to assist Puerto Rico in responding to the catastrophic damage it has suffered, and pursuant to an emergency liquidity program, low-interest loans to assist Puerto Rico in responding to its cash flow deficiencies.” Ideally, Congress would waive matching fund requirements and provide aid in grants versus loans which would simply add to the debt burden. in addition it would increase the limits of disaster recovery programs, allow it to benefit from recovery programs and give Puerto Rico parity for receiving Medicaid funds.

One wild card is the fact that the president has no direct power over the territory’s debt, though he can fire members of the federal board that was set up to oversee the island’s finances and nominate others. If the President sought to become engaged on the matter, he could throw a major wrench into the works through altering the membership of the board. Executive support is crucial to the Board’s efforts to oversee a recovery of the Commonwealth’s finances and debt.

WILL MIGRATION BE A SHORT OR LONG TERM ISSUE FOR PUERTO RICO?

The media has begun to focus on the fact that the long term nature of the recovery in Puerto Rico from hurricane Maria is forcing many to explore alternative off island living arrangements. The impact on hospitals and schools driven by the lack of basic utilities if forcing those with children and significant medical conditions to seek schools and medical care. their status as citizens and the significant Puerto Rican diaspora in the US makes this a viable choice.

While the US population is concentrated in certain metropolitan areas, the area most likely to be on the front line in dealing with this phenomenon is Florida, especially the Orlando area. In Florida, Gov. Rick Scott declared a state of emergency last week for all 67 counties in the state in order to facilitate counties’ efforts to house, educate and help Puerto Ricans by waiving regulations. It is hoped that the declaration could also attract more federal money to the state. Florida will also establish ” relief shopping centers” at relief shopping centers at ports and airports relief shopping centers. These centers will provide one-stop locations where Puerto Ricans can seek assistance with jobs, education, housing and programs like Medicaid and food stamps.

Since many of these current migrants are of less economic means than have been those in the steady stream of migrants over the last decade, there will likely be strains on housing, Medicaid, and education budgets in destination locations.

PENNSYLVANIA BUDGET NEWS

The Pennsylvania Legislature is still debating the revenue side of the FY 2018 budget despite its potential negative impact on the Commonwealth’s credit. The Assembly could not deliver votes for a commercial storage tax or a hotel tax despite their offering of both as counters to a severance tax. The commercial storage tax would have raised approximately $100 million in year one and approximately $170 million in year two. The severance tax passed by the Senate will raise the same amount and is widely supported throughout the commonwealth and among bipartisan legislators. Pennsylvania is the only major gas producing state without a severance tax.

Now the Governor has proposed a different revenue source. Governor Wolf will securitize profits from our state’s liquor system. It will raise $1.25 billion to pay off nearly all of our prior year deficit and significantly reduce the need for additional temporary borrowing to pay our bills. The Liquor Control Board transferred $210 million to the General Fund last year, far in excess of the annual amount necessary to make payments on this loan.

Such a move would keep the Commonwealth in the retail liquor business resulting in monopoly based higher prices for state residents. Such a financing would be in lieu of a much debated tobacco settlement fund securitization.

BASKETBALL SCANDAL COULD IMPACT U OF LOUISVILLE CREDIT RATING

The well publicized scandal involving the University of Louisville basketball program has already claimed famed head coach Rick Pitino’s job. Now it has placed the University’s credit rating in jeopardy. Moody’s has announced that it has decided to revisit a review of the University’s rating for downgrade which it had concluded on July 21.

Moody’s said “newly developing credit issues including recent criminal allegations against senior athletic personnel have the potential for increased financial burden on a currently weakened university liquidity profile and support renewal of the review for downgrade of the ratings. It also noted that questions surrounding integration risk and funds flow impacting the university resulting from the July 1, 2017 academic affiliation agreement with University Medical Center further support the current rating credit action.

The review “will focus on the University of Louisville’s ability to maintain stakeholder confidence and structural balance given its current weak liquidity, which Moody’s estimates at approximately $80 million of unrestricted cash as of June 30, 2017. Timing and intention for installing permanent leadership, along with an assessment of sustainable remediation of ongoing governance concerns, will also be incorporated into the review. Moreover, legal considerations and challenges related to the integration of the new hospital relationship, incremental to other competing operating priorities – such as immediate and longer term trends effects on enrollment, net tuition revenue growth and donor support – will also be central to the analysis.

Adverse impacts from the confluence of these governance, legal, operational and financial risks could put multiple notch downgrade pressure on the ratings.

BEING THE BUSIEST DOES NOT ALWAYS HELP

Madison Square Garden may be the “World’s Most Famous Arena” but the Barclays Center in Brooklyn has actually been the busiest based on number of days in use. In spite of this however, financial performance for fiscal year (FY) ended June 30, 2017 was weaker than expected, owing to a drop in revenues and cash flow caused by the attendance and related ticket sales decline at the New York Islanders home games held at the Barclays Center. Moody’s projects that that similar financial under

performance will continue for the next 12 to 18 months owing in large part to the contractual arrangements between the Islanders and the Barclays Center.

Specifically, weak financial performance during FY 2017 was in large part driven by the Barclays Center’s obligation to make fixed annual payments to the Islanders for an anchor tenant guarantee fee. These payment obligations, which are part of a 25-year license agreement, coupled with lower revenues stemming from attendance related underperformance for the Islanders has resulted in a net loss from Islanders’ related business activities for the Barclays Center for the most recent FY, a financial performance that Moody’s anticipates continuing this season and next season unless there is a substantial improvement in attendance.

So now despite the booming demand for entertainment based in the rapid gentrification of Brooklyn, Moody’s changed Its rating outlook to negative from stable on approximately $526.8 million PILOT Revenue Bonds, (Barclays Center Project) issued by the Brooklyn Area Local Development Corporation (PILOT Bonds) which are rated Baa3.

The Barclays Center’s debt service coverage ratio (DSCR), as calculated by Moody’s, declined to 1.31x during FY 2017 from 1.51x in FY 2016. In addition, the DSCR as calculated by Moody’s for the current fiscal year ended June 30, 2018, is forecasted to decline even further to 1.07x. This differs from the calculation of forecasted DSCR by the arena’s management of 1.35x for FY 2018 because they have bolstered liquidity by including excess cash flow that would otherwise have been distributed. In arriving at the 1.07x DSCR calculation for FY 2018, Moody’s has excluded this excess cash and has reflected only cash flow from operations for that year.

The situation could be improved if the Islanders are able to persuade state and local government to help them construct a new arena closer and more attractive to their core Long Island fan base. There are negotiations underway regarding such a facility to be located on land at the Belmont Park racing facility located adjacent to the Queens-Long Island border with access to highways and Long island railroad facilities.

Muni Credit News Week of October 2, 2017

Joseph Krist

Publisher

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STADIUM AND ARENA BONDS BACK IN THE MARKET

There are two major issues upcoming to finance arenas housing professional sports teams. The first is $140,000,000 Sales Tax Revenue Bonds (Quicken Loans Arena Project) to be issued by Cuyahoga County, Ohio. This current issue and the county’s outstanding sales tax revenue bonds are secured by a senior lien on revenue collected pursuant to the county’s current 1.25% sales tax. Although secured by the city’s sales taxes, debt service on the 2017 bonds is expected to paid with other county resources (1.5% hotel tax and arena event tax receipts), city resources (arena event admissions tax) and rent payments from the Cleveland Cavaliers.

The bonds are rated Aa2 by Moody’s. This special tax sales tax rating largely incorporates Cuyahoga County’s general obligation (GO) rating. While the county has favorably covenanted to direct the State of Ohio state Tax Commissioner to directly transfer receipts first to the bond trustee, this does not achieve complete legal divergence. The rating also considers the large economic base from which the tax is generated, a strong 3.0x additional bonds test, healthy coverage of maximum annual debt service, and positive sales tax trend.

Cuyahoga County is one the two largest counties in Ohio with a population of 1.3 million as of the 2010 Census. Approximately 30% of the county’s population resides within the City of Cleveland, the county seat. County operations include economic development, health and human services, public safety and general governmental functions.

The second is $137,460,000 City of Atlanta and Fulton County Recreation Authority Revenue Refunding and Improvement Bonds (Downtown Arena Project). The facility which will benefit is the Philips Arena, the home of the NBA Atlanta Hawks.

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PUERTO RICO RECOVERY DEBACLE

It is impossible to underestimate the scope of the damage that has been to the economic and financial prospects of the commonwealth of Puerto rico. The physical damage and hardship has been obvious as has the obsequious response of the Commonwealth government at the gubernatorial level. When it became obvious that the deference being paid by the Governor to the President was not yielding results, the mantle of leadership naturally fell to officials at the mayoral level to step up and advance the island’s cause. One can have different views political and philosophical about the style of those like the Mayor of San Juan but there can be no doubt that it had its effect.

We understand the need to get basic services like utilities up and running to the greatest number of people as soon as possible. At the same time, we cannot help but observe that all of the stakeholders in Puerto Rico have a real interest in seeing that the island’s infrastructure is not replaced as is. The totality of the destruction provides Puerto Rico with a real opportunity to move from a trailing position to a leading position in terms of how it provides basic services.

This refers to things like renewable energy that takes advantage of the solar and wind resources that are available in abundance. It provides for the installation of modern water and sewage treatment facilities. Through the use of diverse and alternative technologies, new employment and skills development opportunities can result. Especially in the area of energy, the storm provides a window to reduce dependence on oil (of which Puerto Rico has none) and move towards at least some level of self-sufficiency. This is not about policy or philosophy, it is about economics.

To the extent possible, aid should be directed towards modernization and automation of government systems. Utility lines should be placed underground to the greatest extent possible. Fiber optics should be installed along with new utility lines. The benefits in terms of both efficiency, economics, and reliability would make Puerto Rico a more attractive venue for the establishment of manufacturing and production facilities. it would increase the quality of the schools and thereby make it more likely that residents will stay long term.

Of course, the Commonwealth’s debt and financial management situations need to be addressed. And it is not totally incorrect to wish to address these in an overall context of a successful recovery plan. This will require serious federal support at both the executive and legislative levels. Unfortunately, we have grave concerns about whether the Federal government has the leadership ( and not just about the Tweeter in Chief) at the various federal agencies which would have to be involved in a comprehensive effort. Legislatively, it will require strong leadership from its legislative proxies in Congress given the Commonwealth’s lack of direct representation and inability to vote in US presidential elections.

There was at least one ray of hope from the Congress. Sens. John McCain (R-Ariz.) and Marco Rubio (R-Fla.) have introduced a bill to permanently exempt Puerto Rico from the ban on foreign-flagged ships traveling between U.S. ports. American Samoa, the Northern Mariana Islands and the Virgin Islands are already exempt. In a statement, McCain called the Jones Act “an antiquated, protectionist law that has driven up costs and crippled Puerto Rico’s economy.”

HOUSTON SPORTS BONDS WITHSTAND THE STORM

After a period of financial instability caused by debt management issues that led to a partial acceleration of the Authority’s debt, investors had hoped for financial stability going forward. Obviously, there was concern about the hotel based tax revenues which support debt issued for the various professional sports facilities around Houston in the aftermath of Hurricane Harvey. Some of that concern was ameliorated when Standard and Poor’s announced it had affirmed its outstanding ratings on the Authority’s debt. S&P said that while there may be some short-term budgetary pressures because Gov. Greg Abbott has suspended all laws authorizing or requiring the collection of HOT taxes, the authority has already collected enough pledged revenues to make its principal and interest payment in November 2017. It noted that none of its facilities were damaged. In addition, there were no additional personnel or operating expenditures incurred as a result of Hurricane Harvey.

ANOTHER MINOR LEAGUE STADIUM DEAL MOVES FORWARD

Sarasota County, West Villages and the city of North Port and the Atlanta Braves have agreed on a plan to finance an $80 million spring training facility for the Braves. The move comes after the Braves complete their first season on Sun Trust Park in suburban Atlanta. That facility was the object of some controversy over the public role in financing that was controversial when it was undertaken.

The stadium would include 9,000 seats, a 360-degree concourse, luxury suites, 750 paved parking spaces, six fields and two half practice fields. The costs cited do not include the cost of the land. $20 million in funding had been conditionally approved by the Florida Department of Economic Opportunity. Sarasota County will commit $22 million of tourist taxes to support debt for the project. the West Villages Improvement District will issue debt for infrastructure support for the project which is designed to be the centerpiece of an overall 11,000 acre development. The District will use its special tax authority to secure debt it issues.

The deal marks another step in professional sports’ efforts to extend its record of obtaining public financing for stadia for its major league teams. Spring training has become a huge business in the last two decades and many long standing relationships between teams and communities have been left behind as teams seek to maximize revenues from even these “exhibition” games. In the case of the Braves, it would mark their second move of their spring training base in just over a decade. The Braves will retain all revenues generated by its use of the stadium but they will pay between $2 million to $2.5 million each year toward the debt to build the stadium. The team will be required to pay for routine maintenance.

FLORIDA REVENUE LOSS FROM IRMA

$45 million in revenue is believed to have been lost when the state suspended highway toll collections to help speed evacuations and relief efforts for Hurricane Irma according to Florida’s Turnpike. Tolls were suspended on September 5 to facilitate evacuations ahead of the storm and were only reinstated in full on September 20. Tolls will remain suspended on the Homestead Extension of Florida’s Turnpike south of the interchange with the Don Shula Expressway, State Road 874 (Mile Post 0-17) to help Monroe County residents with recovery efforts.

The Turnpike System comprises much of the state’s storm evacuation routes so the suspension was not unexpected. With a total FY 2018 budget of $1.5 billion, Florida’s Turnpike operations and credit should be well positioned to absorb the impact.

S&P CLARIFIES ITS RATINGS VIEW OF SOUTH CAROLINA PUBLIC SERVICE

On Aug. 2, 2017, S&P lowered its ratings on the South Carolina Public Service Authority to ‘A+’ from ‘AA-‘ and maintained a negative outlook following the decision by Santee Cooper to suspend the the V.C. Summer nuclear units 2 and 3 project construction. In lowering the rating, S&P cited its opinion that, without a generating asset to show for its issuance of $4.6 billion of debt, Santee Cooper had diminished debt issuance and rate-raising capacity, and hence weakened credit quality.

Since then Santee Cooper has reviewed its load forecasts and decided to lower them. A lower load forecast relieves the authority of the immediate need to add generating capacity, and alleviates the need to issue additional debt. For S&P, it believes Santee Cooper has clarified the impact of the suspension on financial metrics, rates, and power supply plans.

As a result, it has restored its outlook for Santee Cooper’s rating to stable. It does not anticipate raising the rating given the financial forecasts for coverage and liquidity, the overhang of legal and political fallout from the suspended project, diminished financial flexibility from future rate increases, and high debt levels that we do not expect to improve meaningfully over the next two years.

Muni Credit News Week of September 25, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$565,000,000

Pennsylvania Economic Development Financing Authority

University of Pittsburgh Medical Center

Revenue Bonds

Fresh off the assignment of a negative outlook to its A1 rating from Moody’s, the dominant provider in the western Pennsylvania market plans to issue debt this week.

UPMC is an integrated delivery and financing system (IDFS) based in Pittsburgh, Pennsylvania, having primarily served residents of western Pennsylvania. It also has drawn patients for highly specialized services nationally and internationally. As of September 1, 2017 Pinnacle Health System, a seven-hospital regional provider in Harrisburg, Pa., has joined UPMC. UPMC’s more than 27 hospitals and more than 500 clinical locations comprise the largest health care delivery system in Pennsylvania. UPMC is the largest nongovernment employer in the Commonwealth. UPMC also offers a variety of insurance products that cover more than 3.2 million lives.

It is the new merger which raises concerns for Moody’s which cited the potential financial and cultural stress of integrating multiple facilities, a good portion of which bring an absence of a longer track record of operations as a NFP facility, while simultaneously expanding the system’s geographic reach. Adding to the strain is the continuation of very modest performance at UPMC’s legacy operations, representing approximately 85% of pro-forma revenue, despite efforts to improve performance. Given the magnitude of the financial leverage, any notable deviation from management’s plans may pressure the rating further.

There is an additional concern that the expansion into central PA represents a new, discreet market for UPMC that carries its own competitive challenges given the presence of sizable providers who are consolidating, as well as the lackluster economy of the local service area.

The debt is secured as a joint and several commitment of the obligated group secured by a lien on gross revenues. The Obligated Group under the 2007 Master Trust Indenture consists of the Parent Corporation, UPMC Presbyterian Shadyside Hospital, Magee-Womens Hospital of UPMC, UPMC Passavant and UPMC St. Margaret. The system also includes several additional hospitals throughout western Pennsylvania, international operations and a variety of insurance subsidiaries as part of its integrated delivery and financing system.

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NEW YORK CASINOS – IS THE HOUSE WINNING?

In 2013, Gov. Andrew M. Cuomo signed a law allowing for seven new, full-scale casinos in New York. Prior to that time, only so-called racinos were allowed such as those at Aqueduct and Yonkers Raceway in and near New York City. They feature video lottery terminals — similar to slot machines — but no table games like blackjack and craps. That expansion has led to an estimated $70 million in new gaming tax and jobs at new facilities and constructions sites, according to casino operators.

The experience at the new casino upstate has been different. While the data only covers the period since February of this year, results have been disappointing. The Del Lago Resort & Casino in Seneca County upstate is on pace to gross about $151 million in gaming revenue in its first year, significantly lower than the $262 million it had projected when it applied for the license in 2014. The Rivers Casino and Resort in downtown Schenectady opened based on first-year projections which ran between $181.5 million and $222.2 million. Since opening on Feb. 8, the casino has grossed $81.8 million —77 percent of even its low estimate.

Supporters of casinos note that some of the new casinos’ amenities, like hotels, are still under construction or only recently opened. Others note that new casinos due in Massachusetts and Connecticut and a $1.2 billion resort in the Catskills, scheduled to open early next year. The owner of Tioga Downs, near Binghamton, N.Y., admits that estimates of income had been optimistic, saying that the gambling market is oversaturated; Tioga Downs faces competition from casinos in nearby Scranton, Pennsylvania. But he argued that the casino expansion had created jobs and contends that that was enough in the weakened lower tier of the state.

The new casinos pay a gaming tax, ranging from 37 to 45 percent on slots and 10 percent of table game revenue which is divided among education purposes and host cities and counties and nearby counties. The Seneca County casino has generated

Of more concern is the fact that new facilities seem to be cannibalizing existing ones. For example, the Saratoga Casino Hotel has seen a significant drop in its net winnings since the opening of the Rivers casino, some 30 miles to the south. On a comparable month basis, the racino brought in about $16 million last August. This August, its net winnings were down by nearly 25 percent and for the year the casino is on pace to contribute nearly $14 million less than it did during the 2016-17 fiscal year. In June, the state agreed to $2 million in tax relief to keep afloat Vernon Downs outside Utica, something he said would save 300 jobs in “a part of the state where we can’t afford to lose 300 jobs.” The problem is the facility was originally pitched as requiring no assistance.

In addition, the state is mired in disputes with native American tribal operations which were established under separate compacts. The Seneca Tribe is one of three that operate casinos and in June it stopped making contractual payments to the state from its casinos. The tribe contends that it has fulfilled their obligations under a 2002 compact, which allowed them the exclusive right to open casinos in a huge chunk of Western New York in exchange for payments to the state. The state filed a demand for arbitration seeking to force the Senecas to pay approximately $31 million under a purported compact extension.

THE REALITY OF REPEAL AND REPLACE

There is no way around it. The Graham-Cassidy bill is bad news for municipal credit. The impact on hospital credits and state credits is obvious. For hospitals, the blow to revenues would be quick and direct. There is no argument against the idea that the bill would increase the ranks of the uninsured, reduce the number of services funded by Medicaid, and generally reduce available revenues to hospitals. On the cost side, it would increase the use of emergency room care as the primary point of contact with substantially more patients. There is plenty of evidence that this is the highest cost and least efficient way to provide medical care.

States would be left with a substantial cost burden. While it is not expected that states would fill all of the gap, there will be great pressure to do so. What will lose funding to compensate? Will it be less education spending in an era where business demands a more highly trained workforce? Will it be for roads thereby making certain areas less attractive to businesses and reducing the likelihood of good paying jobs? Will states have to choose between resident health and the demands of often contractually mandated pension spending?

At the local level, there will be a direct hit to employment. In some areas, healthcare is the major provider of public sector employment. What will be the impact on the entire range of job classes provided by healthcare in cities like Boston, New York, Philadelphia, Pittsburgh, and Houston just to name a few where major national medical facilities are primary employment drivers. The result will be a smaller income base, less retail spending, and less economic activity that stems from a growing and sustained base of disposable income. Will this result in increased demands for state aid from governments already under increasing expense pressure?

And what happens to specialty sectors like continuing care retirement communities (CCRC). The skilled nursing sector (on its own and as part of CCRC) is especially dependent upon Medicaid. There are estimates that some two-thirds of nursing home revenues are derived nationwide from Medicaid as aging seniors outlive their accumulated resources. Does the planned level of reduced Medicaid spending drive the elderly back to family supplied care and maintenance thereby pressuring workforce participation levels and reducing incomes available to fund government?

Should the bill pass the plan is to make significant changes to the federal tax code which will initially pressure the states as many of them key their tax codes off the federal code. Significant changes will then need to be followed by appropriate state statutory changes which will be held hostage to the unique individual quirks of legislative scheduling in each of the 50 states. All of this will conspire to create a brew of uncertainty in which states and cities will have meet the challenge of balancing their budgets.

PENNSYLVANIA DOWNGRADE

It seems that passing only the expense side of a budget is a major step on the road to a downgrade. After waiting nearly three months for a revenue package to be passed, S&P Global Ratings lowered its general obligation (GO) rating on the Commonwealth of Pennsylvania to ‘A+’ from ‘AA-‘. It also lowered ratings on the commonwealth’s appropriation debt to ‘A’ from ‘A+’ and the rating on departmental and moral obligation rating to ‘BBB+’ from ‘A-‘. The outlook is stable.

The downgrade largely reflects the commonwealth’s chronic structural imbalance dating back nearly a decade, a history of late budget adoption, and the weakening of Pennsylvania’s liquidity position, notably the delay or non-payment of scheduled expenditures for the first time in the commonwealth’s history. Its reliance on one-time revenues has stressed its available cash, making internal resources insufficient to timely meet certain obligations.

On Sept. 15, 2017, Pennsylvania missed $1.167 billion in reimbursement payments for medical care under Medicaid, and on Sept. 18, it missed a $581 million payment due to school districts to cover the state’s share of pension obligations. The state treasurer and auditor general announced in a letter that they would not provide another loan to cover the commonwealth’s general fund deficit through the short-term investment program. They called lending to the commonwealth under current circumstances an economic “moral hazard” that would increase long-term risk to the commonwealth’s finances, and stated that they would not lend to the general fund without a balanced budget.

There is a lack of consensus among the branches of the general assembly and the administration on how to balance the fiscal 2018 budget, all plans eliminate the negative $1.54 billion negative general fund balance (4.8% of the budget), which would significantly reduce the commonwealth’s cash flow pressures. Currently, legislators are considering $1.25 billion of certificates of participation secured by tobacco settlement payments and general fund appropriations to help close this gap. The governor released a statement on Sept. 18 that legislators will agree to and vote on a compromise prior to Oct. 1. S&P endorsed the use of borrowing to fund operations. ” Borrowing that restores the commonwealth’s liquidity to a position in which it can make timely payments would be preferable from a credit perspective than an accumulation of unpaid bills.”

A STABLE SOUTH CAROLINA NUCLEAR CREDIT

While the major public power provider in South Carolina has been taking its lumps over a failed nuclear generating project, another agency in the State has been faring better. Piedmont Municipal Power Agency has ten members, all of which are Participants in the Catawba Project. PMPA commenced supplying power and energy to the Participants on June 21, 1985. PMPA is required to sell and each Participant is required to purchase from PMPA such Participant’s All Requirements Bulk Power Supply. PMPA has an undivided ownership interest of 25% in Unit 2 of the Catawba Nuclear Station, which was constructed and being operated by Duke Energy.

Net PMPA revenues derived from member’s take-or-pay power sales agreements and all requirements supplemental power sales agreements. Payments to the agency are considered operating expenses of the member utility systems. The take-or-pay power sales agreements have been validated by the South Carolina Supreme Court and also were challenged by one member and subsequently upheld. Under the take-or-pay power sales agreements, there is a 25% step-up provision which requires participants to increase up to 25% in their respective shares of the project in the event of a default by another participant.

Recently, Moody’s maintained its A3/stable rating on PMPA’s debt which is secured by Net PMPA revenues derived from member’s take-or-pay power sales agreements and all requirements supplemental power sales agreements. Payments to the agency are considered operating expenses of the member utility systems. The take-or-pay power sales agreements have been validated by the South Carolina Supreme Court and also were challenged by one member and subsequently upheld. Under the take-or-pay power sales agreements, there is a 25% step-up provision which requires participants to increase up to 25% in their respective shares of the project in the event of a default by another participant.

Moody’s cited PMPA’s continued focus on recovering annual costs fully through rate increases, resulting in improved financial metrics during the last five years. The rating also recognizes the benefits that such rate increases have had on PMPA’s internal liquidity, which has noticeably improved over the period. A key factor in the rating is PMPA’s demonstrated willingness to implement rate increases over a sustained period, which is in contrast with the past when indenture specified coverage levels were met through the inclusion of rate stabilization funds. Moreover, the rating considers the completion of the capital spending program for Fukushima related capital investments, and that leverage, which is high, has started to decline with scheduled debt amortization and in the absence of a major spending program.

Muni Credit News Week of September 18, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$247,330,000

Philadelphia Hospital and Higher Education Facilities Authority, PA

Temple University Health System (TUHS)

Hospital Revenue Bonds, Series 2017

Moody’s: Ba1

The Commonwealth’s largest provider of Medicaid services is coming to market with debt which will be used to current refund all of the Series 2007A and 2007B bonds as well as a portion of the Series 2012B bonds. Proceeds will also be used to fund a deposit to the debt service reserve fund. Temple University Health System (TUHS) is a $1.7 billion academic health system anchored in northern Philadelphia. The Health System consists of Temple University Hospital (TUH); TUH-Episcopal Campus; TUH-Northeastern Campus; Fox Chase Cancer Center, an NCI designated comprehensive cancer center; and Jeanes Hospital a community-based hospital offering medical, surgical and emergency services. TUHS also has a network of community-based specialty and primary-care physician practices. TUHS is affiliated with the Lewis Katz School of Medicine at Temple University.

The obligated group consists of Temple University Hospital, Inc., Temple University Health System, Inc. (TUHS), Jeanes Hospital, the Fox Chase Entities, Temple Health System Transport Team, Inc. and Temple Physicians, Inc. Each member of the obligated group is jointly and severally liable for all obligations issued under or secured by the Loan and Trust Agreement. The Bonds are secured on parity basis with the obligations currently outstanding issued under the Loan and Trust Agreement. As security for the obligated group’s obligations under the Loan and Trust Agreement, each member of the obligated group has pledged its respective gross receipts. The Bonds are also secured by mortgages on certain real property of certain members of the obligated group. With the issuance of the Series 2012 bonds, a liquidity covenant was set at 60 days.

The Moody’s rating reflects “the health systems large size, clinical diversification, its role as a safety net provider for the City of Philadelphia, as substantiated by historically sizable funding from the Commonwealth, and close working relationship with Temple University (TU). The rating acknowledges the System’s operating vulnerabilities as evidenced by FY 2017’s unexpectedly weaker performance with higher than anticipated expenditures related to an electronic health record implementation and limited balance sheet flexibility due to slim unrestricted reserves. TUHS’ weak unrestricted cash and investments, which we do not expect to grow in the near term, and heavy reliance on governmental payers and special funding constrain the rating.”

The rating was assigned a stable outlook.

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CALIFORNIA REVENUES CONTINUE POSITIVE TREND

The state brought in $8.90 billion in August, exceeding projections in the state budget by $343.7 million, or 4.0 percent. After July revenues exceeded expectations, the positive August numbers put total fiscal year-to-date revenues at $14.99 billion, $532.5 million higher than projections in the state budget enacted in June. Revenues for the first two months of the fiscal year were $1.01 billion higher than they were one year ago.

Led by personal income taxes (PIT), each of the “big three” revenue sources beat expectations. PIT receipts of $5.22 billion in August were $135.7 million higher than 2017-18 Budget Act estimates. For the current fiscal year, California collected total PIT receipts of $9.96 billion, $212.9 million more than anticipated in the 2017-18 Budget Act.

August corporation tax receipts of $95.2 million were $70.0 million – or a whopping 277.8 percent – more than anticipated in the budget. Fiscal year-to-date corporation tax receipts of $458.7 million are $88.9 million above 2017-18 Budget Act projections.

Retail sales and use tax receipts of $3.12 billion for August were $67.3 million, or 2.2 percent, above budget estimates. For the fiscal year to date, sales tax receipts of $4.02 billion are $151.9 million higher than expected.

Outstanding loans of $8.66 billion in August were $1.26 billion less than budget estimates. This loan balance consists of borrowing from the state’s internal special funds. Available borrowable resources in August exceeded projections by $3.82 billion. Compared to 2017-18 Budget Act forecasts, total disbursements were $890.7 million lower than expected.

MASSACHUSETTS REVENUE REPORT

Preliminary revenue collections for August 2017 totaled $1.712 billion, which is $25 million or 1.5% less than August 2016 actual state tax collections. August 2017 preliminary collections are $16 million, or 0.9%, below the monthly benchmark. Over the first two months of Fiscal Year 2018, total actual tax collections are up $66 million, or 1.9%, over the same period last year, and $11 million below the year-to-date benchmark. The small shortfall in August collections reflects mostly lower than expected income withholding payments, partially offset by slightly better than expected performance in regular sales tax and estate tax.

August is a small tax collection month with no quarterly estimated payments due for most individuals and businesses. Income tax collections for August were $927 million, which is $54 million or 5.5% less than a year ago and $33 million below the monthly benchmark. Withholding collections for August totaled $913 million, down $53 million or 5.5% from last August and $30 million below the monthly benchmark. Income tax payments with returns or tax bills for August totaled $41 million, up $3 million or 9.1% over last August and $3 million above the monthly benchmark. Income tax estimated payments totaled $29 million for August, $5 million or 19.7% more than a year ago and $5 million above the monthly benchmark.

Income cash refunds in August totaled $56 million in outflows, which are $9 million greater than last August and $9 million above the monthly benchmark. Corporate and business tax collections for the month totaled $41 million, up $2 million or 6.0% from last August and $2 million above the monthly benchmark. Sales and use tax collections for August totaled $541 million, an increase of $20 million or 3.9% from last August and $8 million above the monthly benchmark. Other tax collections for August totaled $203 million, up $7 million or 3.4% from last August and $6 million above the monthly benchmark.

HARTFORD DOWNGRADE

With the state struggling to finalize its budget and its cities waiting to see what aid might be forthcoming, the city with the most dire situation -Hartford – saw its rating downgraded by Moody’s. The multi-notch move from B2 to Caa1 comes amidst a growing market consensus that the City will file for Chapter 9 protection imminently. Recent statements by the mayor that the city will run out of funds in 60 days in the absence of a state budget providing adequate funding to the city. He reiterated the city’s commitment to restructuring its debt regardless of the state budget outcome and level of support (if any) from the state.

The city has a $5.9 million debt service payment due on October 1st and $21 million in tax anticipation notes payable on October 31st. Additionally, the city has debt service payments in every month of the fiscal year. The rating from Moody’s remains under review pending the outcome of the State budget negotiations and their impact on the city.

PR LITIGATION

Federal Judge Laura Taylor Swain denied a request by several creditor groups of the Puerto Rico Electric Power Authority (PREPA) that sought relief from the bankruptcy stay to commence a lawsuit against the public corporation to put it under receivership. The Ad Hoc Group of PREPA Bondholders and insurers National Public Finance Guarantee Corp., Assured Guaranty Corp. and Syncora Guarantee Inc., which together hold $5.3 billion, or 65%, of the utility’s debt, intended to put PREPA under receivership in order to ensure rates could be raised so the public corporation could pay its debt.

creditors argued that PREPA bonds were secured by “a lien” on the utility’s revenues, “a covenant” that rates would be sufficient to cover its debt service obligations and “a right” to seek the appointment of a receives upon a default event. PREPA and the fiscal board argue that a near-term rate increase will harm Puerto Rico’s prospects for economic recovery. The board further stated that an increase in electricity prices beyond 21.4 cents per kilowatt-hour will result in Puerto Rico not becoming fiscally sustainable.

the official committee of unsecured creditors, which represents the commonwealth government, sued Bettina Whyte, who stands for the interests of the Sales Tax Financing Corp. (Cofina)—a lockbox entity that has more than $17 billion in bonds under its belt and receives a portion of sales tax collections to pay for its debt service. According to the complaint, the commonwealth seeks to stop these transfers and tap into this money by arguing the Cofina structure is “unconstitutional and void,” and as such, the contested sales tax revenues belong exclusively to the government.

Judge Swain is expected to rule on the commonwealth vs. Cofina issue by Dec. 15. The government argues that the legislation that created the entity, Act 91 of 2006, evaded or violated the Puerto Rico Constitution, particularly the commonwealth’s constitutional debt limit.

GAS TAX OPPONENTS FILE FOR A REPEAL INITIATIVE

Reform California, headed by a former San Diego City Councilman, filed papers with the state attorney general’s office Thursday to start the process to collect 587,407 signatures to qualify the measure aimed at repealing a gas tax and vehicle fee increases and require future tax hikes be approved by voters for the November 2018 ballot. Enacted legislation will raise $5.2 billion annually for road and bridge repairs and expanded mass transit. The hikes — raising the gas tax from 18 cents to 30 cents per gallon — start Nov. 1.

A second initiative proposed to repeal the gas tax filed paperwork to get a ballot measure going, but that’s tied up in a court dispute.

FOXCONN TAX BREAKS MOVE FORWARD

The Wisconsin Assembly sent Scott Walker a multibillion-dollar subsidy package for a Taiwanese company, putting within reach the governor’s bid to site a massive flat-screen plant in Racine County. Walker and GOP lawmakers have promised that the Foxconn Technology Group plant will bring thousands of jobs to Wisconsin and transform the state’s economy. The electronics-maker could receive up to $2.85 billion in cash from state taxpayers under the deal, which would make it the largest incentive package for a foreign company in U.S. history.

The legislation would exempt the Foxconn project from some state rules to protect wetlands and waterways — provisions that environmental groups have threatened to challenge in court. Foxconn would not need to write a state environmental impact statement or procure state permits to build in bodies of water but would have to comply with federal environmental laws. The bill would expedite appeals of litigation over the project, creating a path that would likely get any case to the state Supreme Court more quickly. Any trial court rulings in that litigation would be automatically suspended until a higher court rules.

Foxconn has yet to specify a proposed location and that announcement is the subject of ongoing negotiations with local entities. So even if the Governor signs the bill into law, the plant is still not a “done deal”.

NEW SCHOOL YEAR BRINGS CHALLENGES FOR NY COLLEGES

The start of a new school year is always a time of excitement and apprehension for students and schools alike. One area in which this is especially true is the private college space in New York State. This September marks the beginning of New York State’s Excelsior Scholarship Program which will provide students in New York from families under specific income levels with free tuition at state public colleges. At the same time, the Enhanced Tuition Awards Program, which provides up to $6,000 for students who choose to attend private colleges instead of one of the state’s SUNY or CUNY colleges begins as well.

Enhanced TAP recipients must reside in New York State for up to four years after completing their degrees, or else the grants will convert into loans. Students also must complete 30 credits per year, earn passing grades and graduate within four years (for four-year programs) to receive the aid. Under both programs, if you receive a regular TAP award from the state, this will be subtracted and reduce the amount of your Enhanced TAP grant. However, unlike with the Excelsior Scholarship, if you receive a Pell Grant or outside scholarships to go toward your tuition, these will not reduce the amount of your grant.

The Enhanced Program is designed to lessen the impact on the state’s 95 private colleges which might result from reduced demand which would likely tax private college resources who felt the need to offer additional aid in the form of tuition reductions to eligible students. These institutions were among the main opponents to the program when it was debated in the state legislature prior to enactment.

So it is initially surprising to see that two-thirds of colleges in the state (66 out of 95) have not enrolled in the program. The reasons vary. Private colleges who have not enrolled say they found the program too expensive since they already provide generous financial aid for students. They also cite the timing of the program (since most students received their financial aid packages earlier this spring) as well as the restrictions placed on students who receive the scholarship as reasons for not participating. Some object to requirements that recipients had to stay in the state after they graduated or that they had to have a full load every semester or that they had to maintain a particular grade point average.

So those schools have chosen to roll the dice that there are a sufficient number of students who wish more limited class loads or who are looking to go to school near home but do not intend to live in the state after graduation. It will take some time to see if those beliefs are wisely held or if the decision turns out to have significant financial implications. It does however, introduce an additional level of uncertainty and risk into the analysis of small private colleges. It is a space that has been under significant pressure for some time and this does nothing to mitigate that pressure.