Joseph Krist

Publisher

Publisher’s Note: The MuniCreditNews is taking a couple of weeks off for repairs to the publisher. We’ll be back in October.

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$475,000,000

Municipal Electric Authority Of Georgia

Plant Vogtle Units 3&4 Project M Bonds, Series 2019A

Moody’s: “A2” stable outlook
S&P: “A” negative outlook
Fitch: “BBB+” negative outlook

Right up front, we take the view that Fitch is right on this one. We completely understand the value that is put on the general obligation of the participants. But we see it as inconsistent that the market is so concerned  about the sanctity of special revenue bonds in a post Puerto Rico era but is wiling to hang it’s hat on the legals to support this credit.

The Votgle expansion is an economic sinkhole. Nuclear power right now is not viewed by the general public as green in terms of climate change. It is not even economic relative to its competitors. That may change but in the meantime the sunk costs of the expansion and increasing competitive forces pressuring large central utilities like MEAG will continue to weigh negatively on credits.

The reality is that MEAG management with support from politically conservative state officials were willing to bet their utilities credit that they could make nuclear power work. The issue isn’t whether nuclear is the most cost efficient (it’s not), whether its green (emission free is not the same as green), or whether it’s the best choice versus renewables or the dreaded “self-generation”. The issue is that nuclear power does not have a political constituency regardless of its technological merits.

Five pages of risk factors is a hint that this should be a credit that one should be compensated for owning. And this is where the value of the general obligation and the rating that is based on that  comes into play. If this is a revenue bond, than it should trade through its equivalent GO security. If it’s a GO than it should trade behind a revenue bond. That, however, is not what the ratings reflect.

NYC REAL ESTATE

New York is viewed as being at some sort of historic apex in its existence with a rising population and seemingly unstoppable growth in real estate values. It’s impossible to get around Manhattan without navigating a street or side walk narrowed or blocked by residential construction. It would seem to be the best of times.

A new survey has cast some light on the subject which just might alter that image.  A new analysis by the listing website StreetEasy estimates that of 16,200 condo units across 682 new buildings completed in New York City since 2013, one in four remain unsold. That’s roughly 4,100 apartments. Manhattan had the most unsold condos by far: Over 2,400 of the unsold units, about 60 percent, were in the borough, primarily in large luxury buildings.

This data comes at a time when the Manhattan retail vacancy rate has been a continuing concern. The two phenomena are not necessarily linked although efforts by developers to “manage ” their inventory make it difficult to know how much of the vacancies are due to soft demand or owners simply holding tight to their price demands.

This is all going on at a time when the City’s overall economy is still doing well.  There is some cause for concern that employment in the financial sector will soften in the fourth quarter. This will likely further hamper the recovery of the real estate market as these cuts will impact a significant target group of real estate buyers. it reflects the still significant contribution to the City economy made by the financial industry.

The data also shows how the current shape of the New York real estate market drives the issue of affordability. The study showed a number of buildings that have decent sales percentages but that also have high proportions of those units on the rental market. This makes it more likely that these owners are investors rather than buyers with long term interests in the neighborhoods and local economies which they would normally support.

Factors driving the data include the City’s “mansion tax” (up from a flat 1% on million-dollar sales up to 3.9% for sales above $25 million)on those units and the loss of the SALT deduction. The current atmosphere around immigration also impacts the desirability of the market to foreign investors who play a large role in the City’s residential property market.  

The impact from a downturn in  the real estate market directly on the City’s real estate tax base is fortunately tempered by the use of averages over time to determine taxable value. This reduces volatility of the tax base through both ups and downs. The impact of lower incomes and higher end employment would be more rapidly felt.

GM STRIKE

The last time there was a nationwide strike against one of the major US automakers was in 2007. The financial crisis hadn’t fully unfolded and GM was still a solvent entity. But that was as they say a long time ago in a galaxy far away. The industry stands at the center of the issue of transportation and technological change and faces significant choices about its direction. Now that uncertainty has spread into the realm of labor management.

That is the light in which we view the UAW announcement of a nationwide job action against GM. That would impact 46,000 GM autoworkers at 55 facilities in the United States.  In reality, the resolution of an agreement will be establishing a template for managing the impact of technological change on current jobs across the industry. A strike, if extended will be costly in terms of lost income and reduced economic activity. A UAW worker will get only $250 a week in strike wages. The union had $721 million in its strike fund in 2018 and temporarily increased dues in March this year to boost it to $850 million.

The strike is of interest because of the policy implications of what the workers ask for and achieve and how that stacks up against policy proposals from the Presidential campaign. Take health care. Research by the Ann Arbor-based Center for Automotive Research shows that an average UAW worker pays about 3% of his or her health care costs compared with 28% paid by the average U.S. worker. “Unallocated assembly plants” refers to GM’s decision announced last fall that it would indefinitely idle four of its U.S. plants. 

The resolutions reached over these issues are more than a local or state credit issue. They have real significance that will influence a variety of political actions and reactions in light of the “threat” of job losses to technology whether it be through lower overall vehicle production (one potential outcome) or shifts in production based on the adoption of electric versus internal combustion vehicles. It’s about much more than whether local sales tax bond coverages are lowering.

CYBERSECURITY GOES TO SCHOOL

The first days of class should be the most exciting of the school year as new teachers, students, and subjects get introduced to each other. In the case on one Arizona school district, events were something more than exciting.

A ransomware attack on the Flagstaff, AZ school district led officials to close school for a couple of days while they addressed issues associated with the attack. the district ultimately chose to close schools out of an abundance of caution. It wanted to verify the integrity of systems related to the district ultimately chose to close schools out of an abundance of caution. What it did not do was pay the ransom. The district manages its data and information technology on a distributed basis between itself and various third parties including Northern Arizona University   Coconino County and private vendors.

It is not clear how much but the District did have cyber security insurance. This will cover a portion of the remediation. The District is also allowed to use two of its budgeted five snow days to account for the two days the schools were closed. District management says the total financial cost will not be known for at least another month.

So hope fully there is something to learn from this school experience. We learned that the housing of data on a less concentrated basis may be safer than relying on one server or source. We learned that you can get cyber insurance. And we learned that a little financial flexibility (snow days in September) can go a long way as well. We also know that information like this does not necessarily compromise cyber security in and of itself. So why can’t investors get more of this? This incident could go a long way towards developing a disclosure template for municipal credits to follow.

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

Joseph Krist

Publisher

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SOUND TRANSIT FUNDING CHALLENGE

The Washington State Supreme Court will hear arguments on a challenge to the formula used to calculate the value of automobiles for the purpose of calculating the tax due to Sound Transit, the public transit agency in and around Seattle. Taxpayers who are plaintiffs in the lawsuit contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax. That value is used to establish the amount of what is known as the car tab.

Vehicle owners in urban parts of Pierce, King and Snohomish counties pay the tax through their annual vehicle registration, known as a car tab. The suit relies on an interpretation of procedural aspects of how a law is enacted. One provision says no law shall be revised or amended by mere reference to its title. The revised or amended law must be laid out “at full length.” The plaintiffs contend that this did not occur.

They seek the return of hundreds of millions of dollars collected from taxpayers since Puget Sound area voters approved the car-tab tax rate increase in 2016. Sound Transit also must be prohibited from collecting that tax in the future, unless the Legislature votes again on the matter. The car tab dates back to 1990, when the Legislature approved a new valuation schedule for the statewide car-tab tax that had been levied for decades. It overvalued the worth of a vehicle to raise more revenue for transportation projects.

Six years later, the Legislature enacted a law which authorized Sound Transit to collect a car-tab tax. Voters that year approved a 0.3 % car-tab tax to help pay for light-rail projects. Sound Transit used the state’s valuation schedule adopted in 1990. Opposition continued and in 2002, voters statewide approved Initiative 776, which repealed the state law authorizing locally imposed car-tab taxes, Sound Transit’s car-tab tax and the valuation schedule it used.

That initiative was overturned in the Washington Supreme Court in 2006. The Legislature then the Legislature approved a bill authorizing local governments to create regional transportation districts to build roads, in part through car-tab taxes. Four years ago, a bill passed giving Sound Transit authority for a voter-approved car-tab tax not to exceed 0.8 % — on top of the 0.3 % approved in 1996 — for a total of 1.1 % of the vehicle’s value. That bill did not use the schedule with the lower values for vehicles that lawmakers approved in 2006. That formula would have meant less revenue for Sound Transit.

The bill said the higher valuation schedule that Sound Transit had used since it began to collect car-tab taxes in 1997 temporarily would be in effect until its 30-year bond debt incurred in 1999 for light-rail projects is retired. The transit agency has said that will happen in 2028, when its 0.3 per cent car-tab tax is set to end. Voters will already get a chance to vote on transit funding. Initiative 976 would cap car-tab taxes at $30 and also would reduce several other transportation taxes. It has the same sponsor as did the previous failed initiatives to defund public transit.

NYC SPENDING

Two recent reports from New York’s Citizens Budget Commission shed light on spending practices by NYC under Mayor Bill DeBlasio. One highlights the City’s use of leasing to acquire much of its office space. CBC estimates that New York City government leases 22 million square feet (of an estimated 37 million square foot real estate portfolio) from private owners.1 Most leased space houses agency offices (13.5 million square feet), but the City also leases space for public services ranging from schools and day care centers to warehouses, tow pounds, and courts.

In fiscal year 2018 New York City spent more than $1.1 billion to lease space for public facilities and offices—an amount that has grown 40 percent since fiscal year 2014, far greater than the 20 % increase in the City budget, the 12 % increase in asking rents for office space, and the 10 % increase in the number of full-time City employees.  The City Charter requires the Department of Citywide Administrative Services (DCAS) to maintain a list of leased and owned space; however, DCAS does not publish lease-level data on how much space the City leases, how much each lease costs, or how efficiently agencies use their space. 

Leasing has been on the increase since 2009 under the Bloomberg administration but it accelerated at the start of the de Blasio administration. The City does not publish a complete record of leases and space use that includes each lease’s costs, square footage, and occupancy. DCAS only publishes data on the locations of buildings where the City leases space and the agencies located at each property.

At least some effort was made in the prior administration to address the concern over long term leasing by the City. The Bloomberg Administration launched the Office Space Reduction program to reduce the size of the City’s office portfolio by 1.2 million square feet. Through fiscal year 2012 the program reduced occupied office space by 400,000 square feet and saved $15 million in annual rent expenses and $4 million in energy costs.9 The average square footage occupied per employee declined 8.6 percent from a high of 280 square feet in fiscal year 2012 to 256 by 2016. The program was not renewed for fiscal 2017.

The real estate management issue joins several others as sources of opacity and a lack of accountability. The City can’t provide data on the efficacy of its tax incentive plans, it can’t (or won’t) account for spending under the billion dollar Thrive NY mental health program (run by the Mayor’s wife), and current real estate management initiatives did not set reduction targets and did not report metrics, such as square footage per employee, to track progress.

ALASKANS PAYING FOR THIS YEAR’S BUDGET

A new governor has undertaken an aggressive ideologically based approach to the management of the State’s finances. The most prominent example is the gutting of the University of Alaska’s budget which is resulting in the elimination of tenured faculty under financial exigency rules. That was not necessarily something that people explicitly voted for.

Now one of the main cogs in the State’s transportation system has been shown to be a target of the cuts. The Alaska Marine Highway System, (AMHS), released its winter schedule with fewer sailings and a new pricing system. The changes also include the use of dynamic pricing. This is a much loathed system of raising and lowering ticket prices based on perceived demand. The most visible examples are its use by airlines and sports teams.

The State Transportation Department has said “we had to reduce our service by one-third because we just don’t have, we don’t have funding.” The cut was just over $43 million. It means that some communities will lose ferry service for six months. Passenger fares could climb by as much as 30% while vehicle and cabin rates could rise as much as 50% on heavily booked sailings.

We are not talking about minimal expenses for passengers. A passenger going from Haines to Bellingham, Washington can expect a base fare of about $500. But that could increase to nearly $650 if the ship fills up. Fees will increase for changes or cancellations close to travel dates while fares will increase 10% for the days preceding and after special events. 

There are communities which rely on the ferries for access to the mainland and at least one of them will lose service altogether. It is hard to see how this helps the Alaska economy, all in the name of raising the oil dividend. Except the dividend was not raised and remains at $1600. Putting political views aside what the math says is that if you live in one of the communities which is losing its winter ferry service, you lose access to the outside economy and other opportunities, your life gets much more inconvenient and expensive, and you do get $1400 to help you out even all of the cuts were supposed to get you the $1400. It makes no sense.

SCHOOL BUILDING COSTS IN THE AGE OF GUNS

The opening of the school year has been the occasion for several school facilities to be opened and publicized in an effort by both administrators and industrial interests to show off the latest in school building technology. It is hard in the current environment to criticize any effort to promote the safety of school children. I write this as a parent of a public school graduate and the spouse of an inner city teacher in both public and private schools.

Whenever new the technology has an opportunity to be introduced and profited from it will occur. In the wake of the Sandy Hook and Parkland incidents, significant efforts have been made on the part of vendors to have their ;products employed in an effort to provide security in schools. Whether it be surveillance equipment, reinforced materials, designers, or other technology vendors. As the chair of the Partner Alliance for Safer Schools, or PASS has said, “When you have an active shooter situation, I guarantee in the first couple days your inbox is going to have solutions from companies trying to market their technology.”

One school in western New York state is even employing facial recognition technology in spite of the global controversy over its uses and technological shortcomings. The trend of school districts being overwhelmed by vendors is reminiscent of the introduction of computers into classrooms.  A whole industry has grown up around products including biometric screening, outdoor lighting optimized for video surveillance, and audio analytics .

The real capital expense comes with school renovation and construction. A discrete approach to architectural design for schools has developed. In Fruitport, Michigan, a newly renovated high school will be “the safest, most secure building in the state of Michigan,” according to a district superintendant. It reflects a current trend with limited sightlines, wing-wall protrusions for students to hide behind, and an all-seeing reception desk the architect calls an “educational entry panopticon.”  The school features bulletproof glass and other reinforcements. It also costs $48 million.

In Indiana, one school is fitted out with  strobes and horns are installed throughout the hallways and in every classroom for instant alert.  Teachers wear “panic buttons” which can activate the system. each classroom features a hardened door system that will withstand an attack by pistol, rifle, shot gun and followed with using the butt of the shotgun to attempt to knock the vision window out.  This door automatically locks when closed. If it sounds like a modern prison, that maybe because the design firm also designs prisons.

No one is saying that students and teachers shouldn’t be safe at school. The question is are these large expenditures being undertaken because they are effective or has what’s been effective is the marketing by the security industrial complex.

PREPA RESTRUCTURING MOVES CLOSER

The president of the fiscal control board overseeing Puerto Rico’s attempts to restructure its debt announced an agreement with the bond insurers Syncora Guarantee, Inc. and National Public Finance Guarantee Corp. to join the Restructuring Agreement (RSA), which was achieved earlier this year with several holders of PREPA and Assured Guaranty Corp. The agreement now accounts for 90 percent of the uninsured bondholders and all PREPA bond insurers.

Holdouts remain and they stand in the way of a conclusion to the deal. It remains however, an important step in that one less institutional block is an obstacle.

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

Joseph Krist

Publisher

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JUNK LAWSUIT AGAINST ILLINOIS DEBT REJECTED

On Aug. 29, Sangamon County IL Associate Judge Jack D. Davis II denied a request by individual plaintiff John Tillman together with Warlander Asset Management LP, (the money behind the case) to file suit to block the state from continuing to pay off $14 billion in “structural debt” bonds issued in 2003 and 2017. The complaint sought to argue the state violated Section 9 by failing to identify a “specific purpose” for the debt when issuing the bonds at question in the case.

The lawsuit named as defendants Gov. JB Pritzker, state treasurer Michael Frerichs and state comptroller Susana Mendoza. None of them were in office when the bonds were issued. The judge found “the legislation stated with reasonable detail the specific purposes for the issuance of the bonds and assumption of the debt as well as the objectives to be accomplished by enactment of the legislation.” “Despite Tillman striving mightily to do so, he cannot ignore the plain language of the statutes in question,” the judge wrote. “Tillman’s proposed Complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard. Indeed, it resembles far more of a political stump speech than it does a legal pleading.”

The judge went further declaring that allowing lawsuit to proceed would “result in an unjustified interference with the application of public funds” and would lead to a court substituting its interpretation of the constitution for the will of the General Assembly and other elected officials, which the judge said was a “non-justiciable political question.” None of this is surprising. It has also been alleged that Warlander Asset Management LP was hoping to profit from a short position if the lawsuit succeeds.

It is a reflection of how continually annoying it is to hear how non-traditional investors keep trying to bring their “better way” of trading and investing to the municipal bond market. These aren’t corporate entities you’re messing with they are providers of public goods which by their very nature are often essential. Junk lawsuits to facilitate a short are one “improvement” this industry can do without.

CALIFORNIA REVENUES

After finishing fiscal year 2018-19 above the 2019-20 Budget Act forecast by $1.041 billion, preliminary General Fund agency cash for July, the first month of the 2019-20 fiscal year, was $533 million above the 2019-20 Budget Act forecast of $7.794 billion.  Personal income tax revenues for July were $364 million above the month’s forecast of $5.403 billion. Withholding receipts were $353 million above the forecast of $5.06 billion. Other receipts were $11 million higher than the forecast of $762 million. Refunds issued in July were $7 million lower than the expected $322 million.

Proposition 63 requires that 1.76 percent of total monthly personal income tax collections be transferred to the Mental Health Services Fund (MHSF). The amount transferred to the MHSF in July was $7 million higher than the forecast of $97 million.  Sales and use tax receipts for July were $25 million above the month’s forecast of $1.732 billion. July is the firstn month of the 2019-20 fiscal year and includes the final payment for second quarter taxable sales, which was due July 31.  Corporation tax revenues for July were $119 million above the month’s forecast of $357 million.

 Estimated payments were $146 million above the forecast of $290 million, and other payments were $63 million lower than the $162 million forecast. Total refunds for the month were $36 million lower than the forecast of $95 million.  Insurance tax cash receipts for July were $4 million above the month’s forecast of $22 million. Cash receipts fromn alcoholic beverage taxes, tobacco taxes, and pooled money interest were $15 million above the month’s forecast of $100 million. “Other” revenues were $6 million above the month’s forecast of $180 million.

STATE SELLING RAIL LINES

It is easy to forget that there was a long history of government participation in the local economy dating back to the early 1900’s. Cooperative farming entities and a strong mistrust of national institutions supported the notion that the state could have a role in directly supporting farm economies by providing access to markets. Long before the introduction of automobiles and the development of a serious road system, the primary source of transport for people and goods between markets was the railroad.

In reflection of that tradition, the approximately 533 miles for sale were purchased by the state four decades ago when railroad giant Milwaukee Road went bankrupt. Some lines were purchased and restored to service by other railroads once Milwaukee Road went under, but the state purchased the remaining essential lines that were not sold privately. The state is now looking for prospective buyers to take the rails off its hands with the ultimate goal of returning the rails to private sector ownership to boost traffic, tax revenues and job creation.

A total of six lines are for sale, and prospective buyers can propose to purchase a single line, combination of lines or portion of a line to the board. The longest stretch of rail for sale is the MRC Line, running 285 miles from Mitchell to Rapid City.  The segments are operated by different operators under leases and subleases. Any sale will need to be approved by the state railroad board, the Governor, and the federal Surface Transportation Board.

ROADS TO NOWHERE

For years, development proponents have supported state financed road building as a tool to support their projects. The relationship between roads and development is well established. In the municipal bond market, the experience with toll road development projects which were ultimately designed to generate new development has been mixed at best. Failed projects linked to development have been experienced in Colorado, Virginia, Florida, and South Carolina.

Now in spite of those experiences, the forces behind road development are taking another stab at things. For years, Florida governors and legislators have been loath to approve a major expansion of toll roads throughout the State. Development supporters have championed an effort to undertake major expansions (300 miles) of roads to generate development. The latest iteration of the would extend the Suncoast Parkway to Jefferson County, another would extend Florida’s Turnpike to the Suncoast Parkway up to the Georgia border and a third would build an entirely new toll road from Polk County to Collier County.

There is only one small problem with the effort. It apparently does not have support from any of the major non-real estate constituencies which would be impacted. These include elected representatives from four of the counties to be impacted as well as the Florida Trucking Association (FTA). The FTA notes that existing Interstate 10 has wide swaths and many interchanges with “zero economic development.” State transportation officials acknowledged afterward that they have basic questions to answer about the proposed roads. The Department of Transportation does not have data showing the roads were needed.

And that brings us to the credit aspects of the proposal. Too many of them fail even in the presence of data purporting to show need. “There’s some obvious things we know we need to take a look at — the economic feasibility, the environmental impacts, that’s obvious,” a department spokeswoman said. In an age of data driven decision and policy making, this proposal fails to meet minimum tests of practicality. The access to information and data to the public should be driving government decision makers towards better processes for developing, permitting, and executing capital projects. This proposal fails that test.

CAN FREE MASS TRANSIT WORK?

A monthly pass good for riding anywhere in Kansas City, Mo., and its neighboring communities in Missouri and Kansas costs $50 on the regional bus system. A daily ticket costs $3. That doesn’t seem to be too much but ridership tells a different story. On the buses, most run below capacity even at rush hour. On the other hand, the light rail system is looking at expansion to reflect high demand. And the light rail is free.

The Kansas City Area Transportation Authority has been willing to test out a variety of pricing approaches in an effort to boost utilization. Veterans now ride free, as do many K-12 and college students. Partnerships with businesses and local safety-net providers allow them to distribute free rides to their clients. In all, about 25 percent of KCATA riders don’t pay to ride.  

The light rail service which operates in downtown KC has a much better utilization rate. It is also free with operating costs covered through sales and property taxes levied in a special taxing district that extends for about a half-mile on either side of its route. As for the bus system, $8 million a year out of the KCATA’s $105 million operating budget is generated by fares. The city of KC, MO already collects two sales taxes that benefit transit, though not all of those funds are directed toward KCATA. About $2 million per year goes to the streetcar, and somewhere between $3–4 million goes to the city’s public works department. So right there is $6 out of the $8 million in potential “lost fares”.

Making up the remainder from other sources would seem to be feasible. The City of KC, MO already directs $17 million from the city’s general fund to subsidize parking garages. There is also the potential for more revenue from an expansion of light rail and the expansion of sales tax zones to fund the expansion as is the case with existing lines. There could be operational savings from the elimination of duplicative bus service along new light rail routes.

Were the KCATA to eliminate fares across the board, that would make Kansas City the first major city in the country—a few small college and resort towns have already done it—with a free transit system. 

RENT CONTROL IN CALIFORNIA

One clearly emerging trend in state legislature since 2019 has been their willingness to legislate solutions to the issue of housing costs and rents in particular. Under an agreement announced by Gov. Gavin Newsom and legislative leaders, Assembly Bill 1482, would limit rent increases statewide to 5% plus inflation per year for the next decade. The law would also include a provision to prevent some evictions without landlords first providing a reason.

Enactment is however, not a sure thing. The bill is a more stringent version of proposed legislation on the subject. The California Assn. of Realtors, a major source of lobbying influence at the Capitol, had agreed not to oppose a weaker version of the legislation that would have capped rents at a higher percentage for a shorter time. The organization said after the deal was announced that it would lobby lawmakers to vote against the bill. At the same time, the California Apartment Assn., which represents landlords in the state, notes that the announced deal includes an agreement by the organization to no longer do so.

The proposed rent caps have yet to be formally incorporated into the bill, would not apply to properties built in the last 15 years, nor would they apply to single-family home rentals unless they were owned by large corporations. It would not affect existing  rent control regulations, such as those in Los Angeles and San Francisco. The bill would extend caps to apartments in those cities not covered by the existing local measures.

The bill’s anti-eviction protections, which would limit evictions to lease violations or require relocation assistance, would take effect after a tenant has lived in an apartment for a year. A bill must be voted on by September 13.

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

Joseph Krist

Publisher

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PA TURNPIKE FUNDING UPHELD IN COURT

Over the last decade, Pennsylvania has struggled with meeting the infrastructure needs of the state in the face of difficult overall budget pressures. One way that the Commonwealth chose to address it’s crumbling state road and bridge system was to apply revenues derived from tolls on the Pennsylvania Turnpike. Historically, the Turnpike had only rarely raised tolls and yet still achieved a strong credit position. Now the Turnpike is looked to as a major source of road funding for the state as a whole. This has led to regular annual toll increases.

When enacted, the plan to raise tolls to finance non-toll road facilities was controversial. Users did not like subsidizing other facilities. Bondholders did like seeing their credit security diluted. The Turnpike Commission (PTC) saw its rating lowered. The legislation provided that the funding would be temporary requiring the annual PTC transfer to the state to decline to $50 million from $450 million starting in fiscal 2023.

In the meantime, opponents took their case to the federal Courts. In April, the US District Court for the Middle District of Pennsylvania dismissed their lawsuit against the Pennsylvania Turnpike Commission (PTC, A1 senior and A3 subordinate stable) and the Commonwealth of Pennsylvania (Aa3 stable) brought by the Owner Operator Independent Drivers Association, Inc. (OOIDA). The plaintiffs claimed that the PTC and state (and others) violated the dormant Commerce Clause and the constitutional right to travel by charging higher tolls on the turnpike system to fund other state transportation needs, like capital needs of the state’s transit enterprises.

They appealed the dismissal. Last month, the US Court of Appeals for the Third Circuit affirmed the  April order. The appellate judge reasoned that since Congress expressly authorized the use of tolls for non-tolled purposes under the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), the dormant Commerce Clause does not apply. Also upheld was the dismissal of the claim that the plaintiff’s “constitutional right to travel” was violated because not all entry and exit points into and out of the state are “tolled” and thus there are methods to travel across the state that are free, though they may be less convenient. In sum, “the right to travel” does not mean “the most efficient and direct route.”

So the funding scheme remains intact. That is a short run positive for the Commonwealth’s budget. For the Turnpike Commission, the impact is less clear. Now that it has won its litigation challenge, will the Commonwealth amend the legislation and keep the funding scheme in place at its higher current level. The plan has not been positive for the PTC senior lien bond credit. For example, the Commission makes quarterly payments to the Commonwealth for non-PTC projects but recently the state had granted a waiver to the Commission while the litigation unfolded. Once the court handed down the original dismissal order, the waiver from the Commonwealth was not extended and the bill for 2019 and2020 came due. This forced the Commission to issue $712 million of subordinate bonds in June 2019 to pay the state its deferred fiscal 2019 Act 44 payments and the upcoming fiscal 2020 payments.

While the decision may be positive for the Commonwealth’s general credit, the Turnpike Commission remains under pressure. There is concern that the judicial support for the Act 44 funding plan will slow momentum in the effort to establish a more broad based funding plan that takes pressure off the Commissions ratings and bonding capacity.

PUERTO RICO

The Financial Oversight and Management Board for Puerto Rico has released its 2019 annual report. It documents the variety of actions which have occurred in the effort to restructure the Commonwealth’s debt. Our focus however is on the comments regarding the budget for the current 2020 fiscal year. They highlight the inherent conflict between “rightsizing” government relative to its resources with the political reality created by the government’s inordinately large role as a source of employment.

Total government spending of $20.2 billion is focused on the following priority areas: 21% for health, 17% for education, 13% for pensions paid via PayGo, 12% for families and children, and 5% for public safety. The areas prioritized make sense. Here’s where legitimate questions may be raised.  The budget, for example, provides for increased salaries and benefit contributions for police officers and incremental funds to purchase bullet proof vests, radios, and vehicles. Increased salaries during a period when the population at large faces  such huge difficulties?  Social Security is budgeted for all police as of July 2019 to provide them a more secure future retirement. In addition, the Certified Budget raises teachers’ and school principals’ salaries for the second  consecutive  year. This in a school system that faces contracting demand. It also raises the  salaries of firefighters.

The report references, among other places, the experience of New York City under a control board in an effort to prepare citizens for a long recovery period. It’s all well and good to make the reference but to refresh those who forget or do not really know the history, keep these items in mind. New York City made substantial cuts to basic public services in the immediate post-1975 crisis era. Raises? NYC police and firefighters were laid off. That is serious belt tightening.

STORM CLOUDS AHEAD

The outlook for state general obligation credits has been fairly solid up until now throughout the budget process.  We saw many favorable comments about reserves and taxes creating a strong foundation for states to fall back on. Well let’s hope that this do indeed hold up as the economic storm clouds gather at an inopportune point in the budget cycle.

US industrial production decreased 0.2% last month, according to the Federal Reserve, missing economists’ forecast of a 0.2% increase. Meanwhile, 77.5% of capacity was in use at factories, utilities and mines, the lowest figure since October 2017. Continuation of the trend will hurt earnings and tax revenues. Analysts have been cutting S&P 500 profit estimates for the second half of the year. According to FactSet, companies’ earnings will increase 1.5% this year at best, down from a January prediction of growth exceeding 6%.

And that is what could be the problem. Since many of the states budgeted based on best economic data available (which may have included some 1Q data) they weren’t able to account for the current negative impacts of the trade war. The retail industry’s freak out over tariffs is a clue to how fragile things are. Nine major world economies have entered a recession or are on the verge of one.

TECH REDLINING

It is a policy reminiscent of the bad days of urban development. The practice of redlining – the effective refusal of banks to make mortgage loans in certain, usually poorer and less white neighborhoods. The practice has rightly been criticized and has been greatly reduced. One would think that anything that smacked of redlining – no matter what the business – would be a practice which would not be undertaken by our progressive, technology educated brethren. Sadly, this is not the case.

A recent report on scooter use in SF – the epicenter of the micromobility industry – highlights a practice that walks, talks, and squawks of redlining. Despite a promise that it wouldn’t prioritize lucrative wealthy areas of San Francisco over low-income zones, electric scooter company Scoot has blocked drop-offs in two of the city’s poorest neighborhoods. Scoot is a scooter provider which was acquired by Bird – a micromobility provider which has yet to see a regulation it couldn’t ignore.

As a condition for joining the city’s scooter pilot program, Scoot specifically promised it would prioritize serving the Tenderloin and Chinatown as  “communities of concern. ” Scoot claims to only be thinking of the elderly. Communities in Chinatown and the Tenderloin had expressed concerns about potential hazards from scooters to older people and others, as well as possible pitfalls related to narrow sidewalks, so the company decided to exclude areas to address those worries. The no-drop-off zones don’t cover the entirety of either neighborhood, and scooters are available on the peripheries of closed-off areas, so the company believes it is serving those neighborhoods as promised in its permit application.

Bird also maintains red lines around areas of Oakland, its app shows, including Lake Merritt (the home of Barbeque Becky).  Numerous scooters have been deposited in the lake (likely by established neighborhood residents under gentrification pressure from newly arriving tech types). A company spokesperson claims it closed off those areas at the request of city and school district officials.

Lime also operates in Oakland and excludes Lake Merritt and Oakland Technical. A Lime spokesperson said city officials had asked it to close to drop-offs the area surrounding Lake Merritt, and exclude Oakland Technical. Lime also excluded all the other schools in Oakland.

So like Citibikes in New York, the scooter providers just cannot seem to find a way to serve all of a population. They continually reinforce the notion that electric scooters are not a real alternative to today’s public transportation option set but rather a plaything for white hipsters. It simply is not an effective model for developing, financing, and funding public transit.

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

Joseph Krist

Publisher

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MOODY’S AND THE MTA

The transportation space increasingly finds itself at the center of many of the larger debates underway as the nation’s urban landscape develops. One of those issues is the need for significant investment in the nation’s urban mass transit infrastructure. How to pay for it is a question which dominates the discussion on the federal, state, and local levels. So we were intrigued to see Moody’s weigh in on how it thinks transit should be funded at least in the case of New York’s MTA.

First, some context. Funding of the mass transit system in New York has been a constantly evolving process. Initial private investment was ultimately accompanied by public investment and over time the funding responsibility became all public. Each iteration of fun ding policy was accompanied by a variety of funding methods including general obligation debt from the City for the Independent lines. There was always a variety of revenues derived from a variety of sources that matched the diversity of the passenger base.

Over time the realization was achieved that the lifeblood of the economic engine that drove New York State was the City’s mass transit system. It fueled unprecedented levels of development in the City and beyond and the impact was reflected in the source of funding. Fares always generated a higher level of operating revenues than was the case in other cities for years. Those fares, however, were always accompanied by taxes and tolls which effectively accessed much of the income derived from the city economy.

That compact began to fray as the financial recovery of NYC was competing with agencies like MTA for financing. Under those circumstances, a series of dedicated taxes and the authorization of $800 million in fare-backed bonds. The money allowed the agency to buy new cars and fund urgent structural repairs. As time went on bonds became a way to provide political cover to artificially hold down fares and taxes. Taxes are constantly subject to change as the result of one county’s historic intransigence against having to fund the MTA. It is, as they say, no way to run a railroad.

So too it is important to remember that the MTA fare box credit has been remarkably stable given the challenges the system faces daily. This in the face of enormous capital needs, lack of funding consensus, and significant pressures to increase subsidized or even free service. So we find it interesting that after such support of the existing, failing funding model we hear this. “Lagging income growth among the lowest-earning residents of its service area will weaken the MTA’s ability to raise fares and balance its operating budgets,” Moody’s  said in a press release. “However, the essential role of mass transit in the New York economy provides a strong incentive to tap the region’s high and growing overall wealth to subsidize transit operations.”

That’s the sort of leap from rating credit to making policy recommendations that gets the agencies into trouble. Essentially by supporting good ratings for the MTA fare box credit for a long time they unwittingly aided and abetted the effort to postpone funding choices.  When the debate first began essentially in the 80’s, issues of fairness and equity were at the heart of the transit funding debate. That has not changed in the era since but the politics have. This comes off  jumping on the bandwagon. A Brooklyn councilman wants the MTA to offer free service on holidays. He compares is to suspending alternate side of the street parking on holidays. Christmas Day, New Year’s Day, Memorial Day, Independence Day, L​​abor Day and Thanksgiving would be the days. Admittedly, MTA ridership is significantly lower during major holidays. It’s reflective of the political headwinds facing the agency.

If you’re Moody’s is that a train you want to be in front of?

MEDICAID EXPANSION SPEED BUMP

It appears that the Utah state legislature’s effort to have its cake and eat it too as it responds to a voter initiative expanding Medicaid will not fly. At least not from the standpoint of the Centers for Medicaid and Medicare (CMS), the agency with oversight over Medicaid expansion waivers. In November, 2018, Utah voters authorized he expansion of Medicaid eligibility under the terms of the Affordable Are Act. Republicans in the Legislature agreed to expand the program to include people making up to 100% of the federal poverty income line. Under the Affordable Care Act, states can expand Medicaid to people making up to 138% of the federal poverty line. 

And therein lies the rub. Utah was asking for full reimbursement although it was not expanding the program to the same extent. It essentially wanted full coverage even though it was – based on the income limit – only making three fourths of the effort. CMS takes the position that while it remains committed to its goal of allowing states additional flexibility in Medicaid, it would reject plans that would limit expansion enrollment while requesting full Medicaid funding available from the government.

At its core, the action is another in a chain of them coming from the federal government in a continuing effort to gut the Affordable Care Act. CMS approved a version of the plan to serve as a “bridge” ahead of a full expansion, allowing Utah’s Medicaid program to begin enrolling individuals April 1. Those who have enrolled will be able to keep their coverage as the state finds a new solution. It’s worth noting that the program failed to pass even though it contained the current Trump Administration work requirements.

All of this occurs against the backdrop of pending litigation in the Fifth Circuit Court of Appeals which seeks to have the ACA declared unconstitutional.  A District Court determined that the ACA is unconstitutional now that Congress has rolled back the penalty requiring everyone who did not carry health insurance to pay a fine. Other court action generated a third loss for the Administration’s efforts to impose work rules. For a third time the same federal judge who ruled against Arkansas and Kentucky’s work rule schemes ruled that federal health officials were “arbitrary and capricious” when they approved the New Hampshire’s plans, failing to consider the requirements’ effects on low-income residents who rely on Medicaid for health coverage.

Data came out this week in a study by the General Accounting Office (GAO) which shows what might happen if the ACA goes away and the ranks of the uninsured grow again. Medicaid, the joint federal-state program that finances health care coverage for low-income and medically needy individuals, spent an estimated $177.5 billion on hospital care in fiscal year 2017. About a quarter ($46.3 billion) of those hospital payments were supplemental payments—typically lump sum payments made to providers that are not tied to a specific individual’s care. States determine hospital payment amounts within federal limits. In fiscal year 2017, DSH payments totaled about $18.1 billion. 

Medicaid disproportionate share hospital (DSH) payments are one type of supplemental payment and are designed to help offset hospitals’ uncompensated care costs for serving Medicaid beneficiaries and uninsured patients. Under the Medicaid DSH program, uncompensated care costs include two components: (1) costs related to care for the uninsured; and (2) the Medicaid shortfall—the gap between a state’s Medicaid payment rates and hospitals’ costs for serving Medicaid beneficiaries. As we go to press, plans to delay cuts to the DSH program are under negotiation as a part of the federal budget process. Medicaid DSH payments covered 51 % of the uncompensated care costs nationwide. In 19 states, DSH payments covered at least 50% of uncompensated care costs.

MARIJUANA – FACTS OR FEARS?

In the wake of recent efforts to legalize marijuana, it helps to look at the facts behind some of the claims made especially by opponents of legalization. Any debate is always ore useful and illuminating when it is a debate based n facts. Two concerns are almost always cited. One is the potential for increased use by teenagers and the other is the specter of thousands of newly impaired drivers on the roads. No matter one’s position on the matter, it is always useful to look at data to evaluate these claims. In that light, we view the findings of two sets of data from dispassionate sources.

The first issue is that of increased access to marijuana by minors. A recent report from the Journal of the American Medical Association deals with this issue. In the United States, 33 states and the District of Columbia have passed medical marijuana laws (MMLs), while 10 states and the District of Columbia have legalized the recreational use of marijuana. A 2018 meta-analysis concluded that the results from previous studies do not lend support to the hypothesis that MMLs increase marijuana use among youth, while the evidence on the effects of recreational marijuana laws (RMLs) is mixed. 

The estimates generated for the report showed that marijuana use among youth may actually decline after legalization for recreational purposes. This latter result is consistent with findings in prior studies and with the argument that it is more difficult for teenagers to obtain marijuana as drug dealers are replaced by licensed dispensaries that require proof of age. The data is not necessarily consistent.

One study found increased marijuana use among 8th and 10th graders after it was legalized for recreational use in Washington State. However, the same authors found no evidence of an association between legalization and adolescent marijuana use in Colorado. A third study using data from the Washington Healthy Youth Survey, found that marijuana use among 8th and 10th graders fell after legalization for recreational purposes.

On the issue of safety, the Nevada Office of Traffic Safety recently released new data which shows that marijuana related fatalities in Clark County had gone down. The number spiked in 2017 immediately after the legalization of marijuana. However, within a year, those numbers decreased by about 30%. This reflects patterns seen in other jurisdictions.

A study sponsored by the Society for the Study of Addiction, after the legalization of recreational marijuana showed that in the year following implementation of recreational cannabis sales, traffic fatalities temporarily increased by an average of one additional traffic fatality per million residents in both legalizing US states of Colorado, Washington and Oregon and in their neighboring jurisdictions.

LEADING BY EXAMPLE – ELECTRIC BUSES

The Los Angeles County Metropolitan Transportation Authority (Metro) has received its first zero emission electric bus that will be used on the Orange Line later this year. The Orange Line will be the first line to receive these electric buses with a total of 40 buses to be delivered to the agency and deployed on the Orange Line by the fall of 2020.

The buses will be purchased from the US subsidiary of BYD, the Chinese manufacturer of electric buses. China is way ahead of the US in terms of its development and production of electric buses. Bus purchasers are not experiencing the same type of intervention being experienced by rapid transit operators who wish to purchase Chinese made subway cars. The federal government and Congress have acted to intervene in those purchases on national security grounds.

The vehicles are not cheap even from the most competitive vendor. The electric buses cost $1.15 million each in a contract valued at $80,003,282. This contract includes the deployment of the electric buses and associated charging infrastructure. The new buses will be capable of being recharged at various points along the Orange Line to support its 24/7 operation.

Metro hopes to extend its deployment of electric vehicles. In a separate purchase, Metro ordered an additional 65 zero emission electric buses from the manufacturer BYD with five of those buses being 60-foot articulated buses earmarked for the Orange Line and the remainder to be used on the Silver Line that operates between the El Monte Bus Station and the Harbor Gateway Transit Center in Gardena. Metro plans to convert the Silver Line to zero emission buses in 2021.

The electric buses cost $1.15 million each in a contract valued at $80,003,282. This contract includes the deployment of the electric buses and associated charging infrastructure. The new buses will be capable of being recharged at various points along the Orange Line to support its 24/7 operation.

In Atlanta, MARTA has announced that it will replace six diesel buses with zero-emission battery electric models. Funding for the purchase will come from a $2.6 million grant from the U.S. Department of Transportation. The grant is one awarded under the U.S. Department of Transportation the Low- or No-Emission (Lo-No) Grant program run by its Federal Transit Administration (FTA).

Overall, the FTA will award $84.9 million in grants to 38 projects for the deployment of transit buses and infrastructure that use advanced propulsion technologies. These include hydrogen fuel cells, battery electric engines, and related infrastructure investments such as charging stations. The 38 awarded projects are from 38 states. Some other municipal recipients include the Vermont Agency of Transportation and the Prince George’s County, Maryland Department of Transportation.

The use of electric vehicles by transit agencies and governments is a great opportunity for municipal entities to take a leadership position in the transition from internal combustion engines. The involvement of the federal government in funding these projects is a positive development.

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

Joseph Krist

Publisher

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WHEN GUTTING HIGHER EDUCATION IS A CREDIT POSITIVE

We understand that certain actions and events can be seen as having a positive effect  in a every discrete way for an individual credit. A revenue source dries up or is withdrawn and an institution takes clear somewhat radical steps to deal with the situation which serve to shore up the ability to pay debt service in the short run. Such a scenario is likely “credit positive”.  While that may be true n the very near term, there are times when it is hard to view such a credit in a positive light when viewed through the lens of its larger economic and policy impact.

The latest example of that dilemma is what is going on at the University of Alaska. The budget adopted by the Legislature at the behest of the new Governor restores the annual payment to each Alaskan resident funded by revenues in the State’s Permanent Fund. The payment had been reduced in response to lower oil production and prices and declining reserves of oil.  The payment had been reduced to balance the budget in the face  lower oil revenues.

In order to restore the payment to its prior level and maintain a balanced budget, significant cuts needed to be made. Among the entities targeted for cuts was the state’s university system. Under the budget adopted (even after a special session to reconsider the cuts) the state legislature acquiesced and allowed the Governor’s cuts to the University to stand. The result is a reduction of 41% in the states funding for the University effective as of July 1.

The university has represented that it has a moderate amount of liquidity but estimates that if it has to maintain spending at fiscal 2019 levels, it will deplete reserves by early 2020. So the only real response is to cut expenses. The overwhelming majority of expenses at most universities is related to personnel. Much of the expense stem from the tenure system governing faculty. That means that short term budget relief in the face of this magnitude of revenue reduction can only be dealt with extraordinarily. So it is the case in Alaska.

On July 22, the University of Alaska’s Board of Regents voted to declare financial exigency. This is a legal strategy to eliminate tenured positions in the face of extraordinary fiscal circumstances. The University has said that administrative positions will  be the first to be reduced but that efforts to implement cut to faculty including  tenured faculty will follow. In September, the Board of Regents will decide on a course of action.

In response to this action we see the Moody’s headline that says “University of Alaska’s financial-exigency declaration is credit positive”.  We understand that from a very narrow University of Alaska revenue bond standpoint it could be seen as positive. Moody’s notes that the action will force the University to deal with declining enrollment, loss of research competitiveness, a material reduction in liquidity and additional accreditor scrutiny as it implements changes over the next one to two years. This leads us to ask what exactly is credit positive about a credit which faces these aforementioned pressures?

Alaska is a state which because of its size and small population does not have a robust private higher education alternative. Significantly cutting back faculty, offerings, and research can only harm the economy of the State at a time when its major industries e under stress (the price of being resource dependent in an environment of climate change). The diminishment of higher education at a time when technology becomes more and more important to economic success seems  represent an unnecessary self-inflicted wound in the interest of short term gain.

Here’s where the rating agencies unwittingly put themselves in the middle of political debates. The headline “University of Alaska’s financial-exigency declaration is credit positive” will be seized upon by supporter of the cuts as some kind of outside endorsement of the action. Better the rating had been put on uncertain status with the potential for a downgrade than to take an action which could be misused for political ends.

At the end of the day, the cuts are bad for Alaska. Major state universities are not just sources of more reasonably priced higher education. The conduct and produce research which supports, government, industry, and small business. The loss of that capability and knowledge base can have only negative longer term consequences for the State. So we respectfully disagree with the idea that in the broader sense that this move is credit positive.

CALIFORNIA AUDIT

The federal government requires California to publish its Single Audit report, which includes the Comprehensive Annual Financial Report (CAFR), within nine months of the end of the fiscal year, or by March 31, 2019; however, the State Controller’s Office (State Controller) did not issue the State’s CAFR until June 2019, more than two months after it was due. One reason for the CAFR’s delay was that the State Controller did not implement a major new accounting and financial reporting standard for postemployment benefits other than pensions (OPEB) in a timely manner. It also chose a methodology for allocating OPEB liabilities to state funds in a manner that is inconsistent with how the State pays for OPEB benefits, which created the risk of a material misstatement to the CAFR.

Currently, the State pays for these benefits as they become due using the pay‑as‑you‑go method. Specifically, the General Fund initially pays health and dental insurance premiums for state retirees and their dependents, and is subsequently reimbursed by other funds for a portion of these costs based on their proportionate share of the healthcare and dental costs of active employees. However, the State Controller’s allocation methodology is based on the State’s recent efforts to prefund its OPEB liability by making financial contributions to OPEB plans based on pensionable compensation (the portion of employee pay used to calculate retirement benefits). However, these contributions cannot be used to pay benefits until the earlier of July 2046, or when an OPEB plan is fully funded. 

The CSA finding asserts that the methodology SCO used to allocate OPEB liabilities to State funds creates a risk that a material misstatement to the State’s CAFR could occur. However, later in the finding, CSA states the allocation did not result in a material misstatement in the FY 2017–18 CAFR. This was the first year of implementation of Governmental Accounting Standards Board Statement Number 75 (GASB 75), and SCO had to work with the most complete and accurate data available at the time. With the constraints on time and data accessibility, SCO moved forward with what it believed was a reasonable and rational approach, that could be supported by source documents, in allocating the State’s OPEB liability. SCO is not opposed to re-evaluating its allocation methodology in future years when additional information becomes available.

Press reports have expressed some surprise that this is not a big issue for investors. Reports like this one from the State Auditor are useful in terms of highlighting details of potential reporting shortcomings but it is not surprising to us that the discussion is effectively a nonevent in terms of its impact on the State’s credit. It has not been implied that the numbers ultimately generated were untrue. The reasons for the delay do not seem to reflect malfeasance so it really is not a big event.

PUERTO RICO

What we know is that Gov. Ricardo Rosselló resigned Friday as promised. We know that he used a recess appointment to name former non-voting representative to the US House of Representatives Pedro Pierluisi Secretary of State. Thus, Pierluisi automatically became Governor Rosello’s successor. He only promised to serve as governor until Wednesday, when the Puerto Rico Senate has called a hearing on his nomination. If the Senate votes no, Pierluisi said, he will step down and hand the governorship to the justice secretary, the next in line under the constitution.

Even if he retains the position, his options are limited by the short 18 month remaining time on his term. While it is heartening to see that he advocates privatization of the power system-a step we have advocated for since the immediate aftermath of Maria, he also is on record opposing several austerity measures demanded by the board, including laying off public employees and eliminating a Christmas bonus.

Until elections take place in November 2020,  it is hard to articulate a positive case for the Commonwealth’s credit. There will be bankruptcy ruling which will almost certainly be appealed, more maneuvering over the next 18 months for political power on the island, and no real end to the uncertain state of affairs. The Puerto Rico Senate ended Monday the special session convened by former Gov. Ricardo Rosselló to consider the nomination of Pedro Pierluisi as secretary of State. This means that Mr. Pierluisi has not been confirmed thus putting his governorship in legal peril. The Governor’s position? “Given that today the Senate did not cast a vote and that the vast majority of the Senators did not have the opportunity to express themselves concerning my governorship, with the utmost deference to the Supreme Court of Puerto Rico, I will wait for its decision, trusting that what is best for Puerto Rico will prevail.” 

On Sunday night, the Senate sued Pierluisi and the government of Puerto Rico, requesting Pierluisi’s swearing-in as governor be declared null. The Supreme Court gave the Senate, Pierluisi and the attorney general until noon Tuesday to present their arguments.

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

PUERTO RICO

In a week full of events challenging the Commonwealth and creditors alike, the resignation of Governor Rosello effective August 2 was the biggest. His successor at least temporarily was expected to be the secretary of justice, Wanda Vázquez. Ms. Vázquez was next in line under the commonwealth’s Constitution because the secretary of state, who would have succeeded Mr. Rosselló as governor, resigned last week . Mr. Rosselló is the first chief executive to step down during a term since Puerto Ricans started electing their governors in 1947. Now, however, Ms. Vazquez has said that she will not accept appointment to the job.

The line of succession after the position of Secretary of State snakes its way along an unclear path through the remaining Cabinet Secretaries. With this backdrop, some 60 community organizations presented a letter to U.S. District Judge Laura Taylor Swain, requesting that the ongoing bankruptcy proceedings over the island’s debt be stayed until Puerto Rico stabilizes and a comprehensive audit of its debt has begun. Judge Swain is reported in the local press to have granted the petition and halted all adversary cases and claims against the government for 120 days.

After all, it is not clear who will be the governor of the Commonwealth during this later phase of the Title III proceedings. The Governor has resigned. The Fiscal Control Board is in a process of being challenged in court. The designated successor is not in place. The outgoing governor would have to nominate that person to be his secretary of state. It is not at all clear who legitimately represents the island’s citizens.

BURLINGTON BROADBAND

Burlington, VT was one of the first municipalities to finance, own, and operate a combined telecommunications utility.

On March 13, 2019, the city closed on the sale of Burlington Telecom (“BT”), a telecommunications business previously operated by the city, to Champlain Broadband, LLC, an affiliate of Schurz Communications, Inc. (the “Purchaser”). The sale of BT to the Purchaser was approved by the City Council of the Issuer on December 27, 2017, and regulatory approval for the sale was received from the Vermont Public Utility Commission on February 19, 2019. The Issuer received approximately $7 million from the sale.

The sale also resolved outstanding litigation which had threatened the city’s financial position. In late 2009, it became publicly known that BT was unable to make payments on the City’s $33.5 million lease with Citibank or return $17 million of City general fund dollars improperly spent on BT by the prior administration.  These events resulted in a federal lawsuit with Citibank, six steps of downgrades in the City’s credit rating from 2010 to 2012, and a lack of liquidity that put the City’s continued operations of core municipal functions at risk.

The settlement, according to the City brought full and final resolution to the $33.5+ million Burlington Telecom lawsuit with Citibank, as until today’s closing, Citibank retained the ability to re-open its lawsuit;  Citibank’s full release of the City from further BT liability is attached. It recovered at least $6.97 million of the $17 million improperly spent by the City prior to 2010 (an additional recovery of up to $500,000 in the future is possible) In addition, the City retains ownership of the building that houses Burlington Telecom and will begin receiving rental payments of $115,000 a year and tax payments of $18,000 annually.

At the time of closing, the City said that it had ensured that the City’s financial recovery and improved credit rating will continue.  They were quite right about that. Moody’s just announced that it upgraded to Aa3 from A2 the rating on the City of Burlington, Vermont’s outstanding general obligation unlimited tax (GOULT) bonds. It specifically referenced the settlement of the litigation. 

ILLINOIS BOND CHALLENGE

For years, individuals in several states have fought efforts by states to issue debt without some form of direct voter authorization. For a generation of municipal analysts, the name Schultz will forever be associated with numerous legal actions seeking to halt the issuance of various issues of bonds which were not subject to voter approval in New York State. The litigation is strewn across three decades. It should be noted that the suits ultimately were found in favor of the state.

The latest such effort is now occurring in Illinois. A hedge fund and the chief executive officer of a conservative think tank he filed suit in Sangamon County, IL circuit court alleging that bonds issued in 2003 to fund pensions and in 2017 to fund backlogged payments are deficit financing bonds which e plaintiffs assert are illegal. They seek to invalidate up to $14.3 billion of bonds.

One thing that always fascinates is the view of hedge funds versus what their role is in a given transaction. It does not favor investors if debt can be invalidated some 16 years after issuance. It is insistence on respect for the validity of issued debt that has hedge funds portrayed as bad guys in the Puerto Rico restructuring. Now, a hedge fund is essentially taking the other side. So they are not consistent and heir position doesn’t make sense.

In the case of the think tank plaintiff, the political animus of the CEO towards the Democrats in the state legislature is well established. The Illinois Policy Institute backed an Illinois employee named Mark Janus in his challenge to the constitutionality of mandatory union fees.  In 2014, the institute helped defeat a movement to amend the Illinois Constitution and replace the state’s flat income tax with a progressive income tax.  Voters will have a chance to vote on the income tax in 2020. They are expected to vigorously oppose the proposed income tax changes.

The institute faces the reality that it will be very difficult to reduce pension liabilities in the near term. If the state ceases making principal and interest payments on the debt it could contribute an additional $13 billion to its pensions over the next 14 years, according to the complaint. So this is their fallback.

As is the case often, this one relies on the parsing of words. Article nine, section nine of the Illinois Constitution says the state may issue long-term debt only to finance “specific purposes” if approved by three-fifths of the legislature or by popular referendum. Using bond money to cover general expenses, speculate in the market, or pay past-due bills isn’t a “specific purpose” for incurring state debt, but rather another name for deficit financing, the complaint said.

WHO SAYS TECHNOLOGICAL CHANGE ONLY CREATES GREAT JOBS?

We came across a fascinating story this week about the expansion of an industry as the result f disruptive technological change in the transportation space. it’s not what you think. It’s the expansion of the repossession industry into the electric scooter space. There is a real company in San Diego called ScootScoop. They are paid by business owners and landlords who are fed up with the deluge of dockless two-wheelers. It is a two man operation with a yard for scooter storage and a tow truck. ScootScoop charges the scooter companies $30 for pick-up and an additional $2 for each day that the scooter is in storage, capping the daily fees off after a month.

It hasn’t gone all smoothly. A lawsuit was filed in California Superior Court in late March which accused the company of improperly impounding Bird’s scooters and then “ransoming” them back to the $2 billion company. Lime filed a nearly identical suit soon after.

Many observers have wryly noted that the scooter companies are relying on the California Vehicle Code. The scooter companies have fought every attempt to enforce regulation of their industry under the same code. Others respond more strongly. A federal lawsuit has been filed by a disability rights group against Bird, Lime, Razor, and the City of San Diego. It claims that scooters are being left in front of wheelchair ramps, curbs, and crosswalks. 

It is all part of the battle for control over the streets and the revenue which can be derived from them. On July 1st, the City of San Diego – one  the defendants – implemented new regulations to address the scooter complaints. They require scooter companies to obtain insurance policies, free the city from all legal liability, cap speeds on the boardwalk, and obtain permits for every scooter in circulation. 

LONG TIME MUNICIPAL UTILITY UP FOR PRIVATIZATION

The Jacksonville, FL Electric Authority (JEA) board voted to give its CEO the authority to explore methods of privatizing JEA, including becoming a privately held or investor-owned company; evaluating an initial public offering making JEA a publicly traded company; or converting into a customer-owned utility. Privatization is one potential solutions to shrinking energy sales and declining revenue due to increases in energy efficiency and falling costs of home generation of renewable energy. 

The board chose from among a series of alternatives. One  scenario detailed in May would have put in place a 52% electric rate increase, a 15% rise in water rates and a reduction in JEA’s city contribution from a projected $118 million in fiscal year 2020 to nothing by 2023.  Scenario 2, or a “traditional utility response,” would have cut 574 jobs at JEA and raised electric rates 26% by 2030.

The vote also retains a $72.2 million plan between JEA and Ryan Companies US Inc. to build a high-rise headquarters in Downtown Jacksonville for the city-owned utility. JEA would then lease the building from the private builder. City Council approved the on June 25, effectively simultaneously with a  JEA’s board vote to enter into the lease 

The CEO has predicted that researching the options for privatization will take six to nine months. Should the board decide to sell JEA assets in a sale or competitive solicitation, it would require additional board action, approval by council and a voter referendum. The CEO is on record that a privatization would have to provide the city $3 billion as a supplement to future JEA annual contributions, give $400 million to customers as a rebate, guarantee a 3-year contractual rate, fund and provide the city and the Duval County Public Schools with 100% renewable energy by 2030; fund and provide 40 million gallons daily of alternative water capacity for Northeast Florida by 2035.

It would also have to guarantee protection of certain employee retirement benefits; maintain employee compensation and benefits for three years; make retention payments to all full-time employees at 100% of their current base compensation, and maintain the agreement to lease a new headquarters and retain employees in Downtown Jacksonville. The board also approved the introduction of legislation to council to revise employee pensions. The resolution would guarantee that all current employees receive full retirement benefits in the event of privatization. 

It is not clear how much support a privatization has. The mayor said in April 2018 he would not submit a proposal to council to privatize JEA. He said he would not support a decision by the JEA board that would lead to “hundreds of job cuts or failure to meet the retirement needs of career employees.”

“As a publicly owned asset, the value of JEA is built on the investment of taxpayers. Any policy regarding the utility’s future must respect that investment. Jacksonville taxpayers are co-owners of the utility and must have a voice in the future of their investment,” 

A private buyer would have to redeem the JEA’s outstanding debt in the event of a sale.

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

Joseph Krist

Publisher

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ISSUE OF THE WEEK

CommonSpirit Health is the entity which resulted from the merger of Dignity Health and Catholic Health Initiatives. It is now coming to market with four bond issues totaling $5.8 billion of combined principal. The new ratings on CommonSpirit are BBB+. This reflects actions by S&P Global Ratings which lowered its long-term rating and underlying rating (SPUR) to ‘BBB+’ from ‘A’ on all debt issued for Dignity Health, Calif. The existing BBB+ rating on debt for CHI was maintained but the positive outlook was removed.

The plan of finance submitted is expected by management to provide $6.3 billion of bond proceeds (including net premium), the majority of which will be used for current refundings and advanced refundings of multiple series of bonds issued on behalf of Dignity Health and CHI. The advance refundings will be financed through the $2.7 billion taxable bond portion of the issuance. A portion of CHI’s CP program will also be refinanced, although the program will remain outstanding for potential future use. Approximately $600 million of net new debt is included in the $6.3 billion, and CommonSpirit intends to use these funds for reimbursement of prior capital expenditures; the funds are available to support future capital investments.

The rating incorporates what we call integration risk. S&P refers to this process as “growing pains”. The outlook assumes that no new net debt will be issued at least through the first year of consolidated operations.  We view the merged entity as symbolic of where health credits will be continually pressured to grow and consolidate. The availability of a large and sound balance sheet has been an effective tool for hospital managements to deal with the vagaries of healthcare funding. It also position these institutions to more effectively manage their reimbursement relationships with private insurers.

Nonetheless, CommonSpirit’s ratings will continue to be weighed down by the substantial debt burden which has historically been a significant negative drag on the CHI credit. it will take time to reduce the burden and provide a base for ratings improvement

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LAS VEGAS MONORAIL

This is one of those credits which keeps rising from the grave. The project went bankrupt in 2010. Now the Monorail Co is pursuing financing for an extension to serve two additional hotels on the Strip. The Monorail Co. has also approached Nevada Gov. Steve Sisolak’s office “regarding a substantial new bond financing proposal,” according to a Monorail spokesman. The Monorail Co. has repeatedly delayed the start of construction on its planned extension to Mandalay Bay. Securing new bonds to finance the project have proven difficult for a system that went bankrupt in 2010 after ticket sales fell well below official projections.

The Monorail Co. is still working to secure an additional $172 to extend its mile track on the Strip’s east side to Mandalay Bay and to the MGM Sphere at the Venetian arena project. Budget documents showed the system was expected to make about $6.5 million less in ticket sales in 2017 and 2018 than was forecast in a Monorail Co.-commissioned ridership study published in April 2016. 

Earlier this year the Monorail Co. president asked the Clark County Commission to guarantee up to $135 million of hotel room tax revenue over 30 years if the monorail needed it to help pay for the extensions. The commission has yet to make a decision on the request. Monorail backers just continue to fail to see the reality that like so any other public transit facilities, fares are never enough to pay the costs including capital costs of these projects.

PHILADELPHIA

Over the last several years, cities like Detroit with its bankruptcy and Chicago with its well documented pension problems have dominated the attention of observers of city finances. That focus has allowed the City of Philadelphia to effectively fly under the radar as it deals with issues of economic development homelessness, its education system, and public transportation. When investors were trying to decide which cities might be candidates for bankruptcy in the middle of the decade, Philadelphia was often mentioned among likely candidates.

Now Philadelphia has begun to distance itself from the likes of Detroit and Chicago. It plans to soon issue $356 million General Obligation bonds. In connection with that sale, Moody’s has announced that it maintains its A2 rating on the City of Philadelphia’s parity General Obligation debt as well as an A2 rating on its outstanding service fee and lease revenue bonds (non-pension related). It also maintained an A3 rating on the city’s pension obligation bonds.

The outlook is stable for all rated securities. The outlook is stable given the city’s materially improved financial position at fiscal year 2018 end, projections that show relative financial stability over the next five years, and permanent funding for Philadelphia schools that largely eliminates its previously projected deficits. The stable outlook also reflects continued positive trends in the city’s economy, contributing to its improved financial health, consistently conservative budgeting and Moody’s expectation of continued positive budget to actual variance going forward.

Moody’s said that the A2 rating reflects the city’s large and diverse tax base and its position as a regional hub for the mid-Atlantic US. It also incorporates other tax base strengths not captured in traditional metrics, such as a significant “eds & meds” presence that serves as a considerable tax base anchor, offset by some persistent weaknesses, like the city’s very high poverty and above average unemployment rate. The city also continues to face a moderately high debt and pension burden.

The comment did reflect some concerns not particular to Philadelphia but reflective of the Detroit and Puerto Rico bankruptcies. “The city’s pension obligation bonds are rated A3, one notch below the city’s GO and other service fee debt, to reflect a higher loss given default risk given relative performance of pension obligation bonds relative to other debt in Chapter 9 bankruptcy scenarios.” So there it is. The relative treatment of pensioners versus creditors now begins to creep into the market. Absent clearer legal guidance, the initial effect will be seen through the ratings process rather than through rush to the courthouse by weaker credits.

ANOTHER NEW HOSPITAL CREDIT

Nuvance Health is an integrated health system based in Eastern New York and Western Connecticut. The system operates seven hospital campuses: Vassar Brothers Hospital, Putnam Hospital, Northern Dutchess, Danbury Hospital, New Milford Hospital, Norwalk Hospital and Sharon Hospital. The system is looking to issue debt for the first time as a combined entity following  the April 1, 2019 merger of Health Quest (HQ) Systems and Western Connecticut Health Network (WCHN). The combined stem includes two tertiary care facilities and further supported by several community hospitals along the Mid-Hudson Valley and Western Connecticut region. 

The new credit comes to market with a Moody’s A3 rating. According to Moody’s, “the rating favorably anticipates realization of modest net synergies and efficiencies from the proposed centralized operating model. That said, execution risk will be high given the new merger, provider fee variability in Connecticut, a large presence of a unionized workforce at both legacy systems and the current and unexpected downturn in performance at HQ due to weaker volumes and physician turnover. It also cited its view that  cash will decline over the next three years as the system funds the equity component of a new patient tower at HQ’s Vassar Brothers Medical Center this year (set to open, as planned, in 2020). Other large capital projects are planned at both the NY and CT hospitals which will require the use of cash and proceeds from the upcoming financing, including construction of a new medical school.

With all of that, a negative outlook was assigned to the rating. The negative outlook reflects Moody’s view that Nuvance Health will face near term challenges to achieve and sustain stronger operating performance to support high leverage while liquidity will decline given a higher capital plan over the near term. Inability to achieve projected improvement or declines in liquidity beyond expectations will pressure the rating.

PUERTO RICO

The situation in Puerto Rico continues to grow and evolve. The move this weekend by Governor Rosello to hold on to his potion smacked of desperation. He will not run for re-election in 2020 and he resigned as president of his New Progressive Party (NPP). The fact that key positions in the succession chain are vacant only adds to the instability and uncertainty. The opposition to the Governor will focus on street protests and the legislature. More than 200,000 people have signed a petition on Change.org demanding that Puerto Rico Gov. Ricardo Rosselló resign for his “incompetence and lack of maturity to govern and for continuous corruption charges at the highest levels of his cabinet.”

Pressure will shift to the Legislature to consider impeachment if the Governor chooses to stand and fight. As for creditors, none of this helps. There was already significant mistrust among the parties and the pending decisions in  the Commonwealth’s Title III proceedings will be harder to implement given the existing executive branch vacancies. The Secretary of State, the executive director of the Fiscal Agency and Financial Advisory Authority as well as interim director of the Office of Management and Budget (OMB) and the government’s chief financial  and investment officers—resigned from their positions.

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

Joseph Krist

Publisher

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THE EMERALD CITY

The Muni Credit News took a couple of weeks off (hopefully you noticed) and headed to the Northwest. Part of that trip included a visit to Seattle. The city tries to be on the forefront of progressive governance whether it be transit, the environment, or social policy. It tries to leverage its role as a tech headquarters to create a modern image but it struggles with some longstanding issues. Much has changed yet at the same time much has remained the same.

The first issue is a symptom of the underlying problems. That issue is homelessness. The numbers of homeless mostly mentally ill individuals is clearly higher. They are not hidden away, they are right in the city center. And they are aggressive. It is the sort of situation that easily deters visitors. There is no easy fix. Yet this creates additional costs for the City of Seattle until the underlying problem is addressed. Which brings us to the issue of development.

There was lots of construction and almost all of it residential. So that will increase supply and availability to meet the local housing needs across the board? No. The development was all geared towards market rate buyers. Half to one and a half million market rate. It wasn’t really clear where if any where affordable  housing was being developed.  That means the problem will just continue. The old tools which have been tried and abandoned in other cities – including the installation of various items designed to deter public sleeping in open city spaces – are all on display. And failing in the absence of housing supply.

Then there was transportation. Whatever you want they have – monorail, bus, light rail, subway, traditional electric buses (on overhead lines). And they certainly have lots of micromobility. Scooters and electric bikes strewn all over the sidewalks. When you read about the phenomenon you ask is it really that bad? Unfortunately, the answer is yes. Seattle was the first major city in North America to allow private dockless bike sharing companies to operate within the city beginning in July 2017. At least Manhattan learned something and will not allow the vehicles in Manhattan.

SANCTUARY CITIES

The early successes in federal court on the part of those cities seeking to receive funding for local law enforcement from the federal government suffered a setback this week. A number of so-called “sanctuary cities” sued the federal government after grant requests were turned down when those cities could not certify that the focus of the supported law enforcement efforts would be directed at illegal immigration enforcement. The Department of Justice (DOJ) chose to prioritize agencies that focused on unauthorized immigration and agreed to give Immigration and Customs Enforcement (ICE) access to jail records and immigrants in custody. 

The particular program in question is Community Oriented Policing Services (COPS) grants. The program really doesn’t have anything to do with immigration enforcement. The city of Los Angeles first sued the administration after it was denied a $3 million grant on the grounds that it did not receive the money because it did not focus on immigration for its community policing grant application. A federal district court judge found in favor of the City.

Now, The 9th Circuit Court of Appeals ruled that the Department of Justice (DOJ) was within its rights to withhold Community Oriented Policing Services (COPS) grants from sanctuary cities. “The panel rejected Los Angeles’s argument that DOJ’s practice of giving additional consideration to applicants that choose to further the two specified federal goals violated the Constitution’s Spending Clause.”   

An appeal would be expected in that other California cities have had success in the courts over the issue of grants and new requirements to obtain them. What does not help is how the law works. Congress created the fund in 1994. It was meant to provide federal assistance to state and local law enforcement to get more police on foot patrol and improve police-community interaction. However, the law provided for the Justice Department to administer the funds.

PUERTO RICO

Protesters amassed in Old San Juan for several day to demand the resignation of embattled Gov. Ricardo Rosselló. The position of Secretary of State  was occupied by Luis G. Rivera Marín until he resigned Saturday. The positions of chief financial officer and representative of the governor to the island’s Financial Oversight and Management Board, both held by Christian Sobrino became vacant on Saturday as well.

The Governor is in the midst of a political scandal resulting from a release of e mails sent by staff which disparaged legislative and other political opponents of the Rosello administration. The messages include 889 pages of a messaging app chat group in which Rosselló and his inner circle speak without inhibition about how to manipulate opinion polls, how to mark officials and journalists to affect their reputation, and how to handle operations to give the impression that they are addressing fundamental problems that affect citizens.

So what’s the point? The Rosello administration has been exposed as a sham. It finds itself the subject of federal indictments from the U.S. Department of Justice against former Education Secretary Julia Keleher and Ángela Ávila, the former executive director of the Health Insurance Administration. There have been enough concerns about this administration’s competence. Now it looks like they haven’t even been trying.

Under these circumstances, the implementation of a final plan of emergence from the Title III proceedings is now a longer way off. It is most likely that whatever decision reached by Judge Swain will be appealed. In the meantime creditors face a Promesa board of unclear standing, an extremely weak chief executive, and a poisonous political atmosphere. And regardless of intent, a blank check has been handed to opponents of real aid and reform including the President.

The resolution of Puerto Rico’s effort to escape its debt burden and reinvent its economy will not in and of itself create success for Puerto Rico. The latest political saga is but one in a long line now spanning two generations of political failure. Already a significant opening has been ignored which would have provided much cover for the hard decisions which needed to be made. Regardless of how this all turns out, it will go down as a missed opportunity.

CONNECTICUT PENSION REPORT

The Connecticut Legislature established the Connecticut Pension Sustainability Commission to study the feasibility of placing state capital assets in a trust and maximizing those assets for the sole benefit of the state pension system.

The Commission’s key findings, conclusions and recommendations The Commission’s key findings, conclusions and recommendations include a belief that it may be feasible for the state to establish a mechanism to identify and transfer state assets into a trust for the sole benefit of the state’s pension funds. The Commission recommends that the legislature provide specific policy guidelines before specific assets are considered for potential contribution to a trust mechanism and concludes that the Office of the State Treasurer is the appropriate authority to provide oversight and direction on the management of any kind of asset trust

The Commission believes that the concept of using the proceeds of the Connecticut Lottery for the benefit of the pension funds or the wholesale transfer of the Connecticut Lottery, as an asset to the funds, is technically feasible.  In many cases, a program such as this would be a sign of weak governance but the reality is that traditional approaches to addressing the State’s extreme unfunded liability position are not going t cut it.

The Commission consisted of appointees from all the major legislative and executive agencies. That should in theory provide cover for any legislators needing it. Commissions are a tried and true way to drive consensus on topics with no obvious political upside. Pension funding  is one of those issues. Let’s see if they take advantage of the opportunity.

SEC CONTINES ENFORCEMENT EFFORT

The Securities and Exchange Commission (SEC) has announce another enforcement action in the municipal securities space.

The latest matter involves a registered municipal advisor’s use of unregistered “solicitor” municipal advisors to solicit business from school districts in California. In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which amended the Exchange Act to establish a federal regulatory regime applicable to municipal advisors. The Exchange Act and SEC rules and regulations identify two broad categories of municipal advisors: (1) those that provide certain advice to or on behalf of a municipal entity or obligated person; and (2) those that undertake certain solicitations of a municipal entity or obligated person on behalf of an unaffiliated broker-dealer, municipal advisor or investment adviser. The latter category of municipal advisors are known as “solicitor municipal advisors.” Section 15B(a)(1)(B) requires all municipal advisors to register with the Commission. The registration requirement for solicitor municipal advisors is intended to provide protection and transparency to municipal entities and obligated persons as they make decisions on the hiring of financial professionals, including the hiring of municipal advisors.

Dale Scott & Co., Inc. (“DSC”) is a seven employee municipal advisory firm located in San Francisco, California, that provides advisory services to school districts and community college districts in California. DSC is registered as a municipal advisor with both the Commission and the Municipal Securities Rulemaking Board. Between October 2011 and March 2016, DSC engaged three unregistered parties to provide various services to DSC including to solicit municipal advisory business on DSC’s behalf. By soliciting municipal advisory business on behalf of DSC without properly registering with the Commission, those three parties violated the registration requirements of Section 15B(a)(1)(B) of the Exchange Act. DSC was a cause of those violations.

Why should the individual investor care? So often when an issuer finds itself in trouble financially it has often followed the advice of  unscrupulous advisor. It is a natural outgrowth of the knowledge imbalance between issuers and other market participants. The nature of political and elective turnover makes it more difficult for issuers to rely on their own in-house expertise. It is all the more important that issuers receive advice from those advisors who properly register and disclose.

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

Joseph Krist

Publisher

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WHAT DOES A RATING REALLY SAY?

One of the characteristics of credit analysis in the municipal space is its willingness to divorce operational from financial issues. In the transportation sector this is especially true. Whether through the use of pledged revenues derived from non-transit sources (like sales taxes) or legal structures creating gross liens on revenues, the linkage between operational issues and credit perceptions remains weak.

We mention this in connection with ratings actions taken this week by Moody’s regarding debt issued by the Washington Metropolitan Transit Authority (WMATA). WMATA has been best known for its service difficulties, declining ridership, and significant capital needs. So it was a little surprising that WMATA revenue bonds had been the subject of an upgrade at this time.

Nonetheless, Moody’s Investors Service has upgraded to Aa3 from A2 the rating on gross transit revenue bonds of the Washington Metropolitan Area Transit Authority, DC (WMATA). The outlook on the rating is revised to stable from positive. Clearly the role of Virginia and Maryland in providing operating subsidies is the overriding factor in this move. “The upgrade to Aa3 incorporates the strong operating environment of the authority, which itself is grounded in continued commitments from the District of Columbia (Aaa stable) and the states of Maryland (Aaa stable) and Virginia (Aaa stable) to financially support the transit enterprise. Subsidies from these governments now cover more than half of WMATA’s annual operating costs.

We have seen though, that support for subsidizing the system has been known to waver. It is hard to see how a system like this with as many management, organizational, and political hurdles to overcome while relying so heavily on outside revenues. As operational issues arise as they did in recent years, they are a source of tension which lead to uncertainties about ongoing subsidy levels.

In making the case for the upgrade, Moody’s cited “improved internal liquidity, continued bank support through lines of credit, and greater certainty with regard to federal grant funding following the FTA’s approval of the Washington Metrorail Safety Commission’s Safety Oversight Program. ” At the same time, the announcement highlights “weak coverage of debt service by net operating revenue, though this is also mitigated by the role played by the state and local government subsidies. A key challenge factored into the rating is WMATA’s heavy post-employment benefits burden. Unfunded pension and OPEB liabilities are high relative to the authority’s revenue and will likely remain a source of rising expenses for years to come.”

It all adds up to quite a mixed bag of factors to evaluate. Our view is that these are enough to hold the rating at its previous level, hence our surprise at this point in time. It’s only been three years since the Authority’s debt was downgraded. It seems like a pretty quick turnaround from here.

LAUSD ELECTIONS HAVE CONSEQUENCES

The recent failure at the ballot box of a proposal to increase property taxes has rightly been seen as a blow to the District’s credit outlook. When the District reach an agreement with its teachers to raise wages and increase resources to the schools, it was widely assumed that support for the teachers goals would translate into support for increased funding from the taxpayers.

That turned out to be a significant miscalculation when voters rejected a proposal for a parcel tax to fund the increased costs of the settlement. The defeat has forced the District to scramble to find ways  keep its budget balanced without the increased revenue to fund a higher cost base. One had to wonder when these events would manifest themselves in the District’s ratings.

It did not take long to see action. Last week, Moody’s Investors Service has downgraded Los Angeles Unified School District, CA’s outstanding general obligation (GO) bonds to Aa3 from Aa2 affecting approximately $10.2 billion in outstanding debt. Specifically it said that “the rating downgrades reflect the district’s structural budgetary challenges and limited financial flexibility stemming from rising fixed costs and recent concessions with the teachers’ union for higher salaries and increased resources. The district faces revenue constraints arising from declining enrollment, increasing dependence on state aid growth that’s slowing and voter rejection of a recent parcel tax measure. As a result, the district is facing a $500 million budget gap.”

The nation’s second largest public school district and the largest one which issues its own debt clearly faces daunting challenges. One thing everyone agreed on at the end of the January teachers’ strike was that the funds to pay for it were not there. So let’s hope that Moody’s note that “management that has a record of outperforming budgeted projections and built up sound reserve levels that buy it time in responding to these challenges before they would cause financial strain” proves out.

PUERTO RICO

It is impossible to comment on events in the municipal space without doing so in regards to the latest efforts by Puerto Rico to evade its legal and moral responsibilities. Previously, I described the efforts to expunge debt while minimizing the pain inflicted on the electorate as being on a par with a drive by shooting. You may get your target but lots of innocent people can get hurt in the process.

Puerto Rico justifies its actions towards debt holders by invoking the specter of the evil hedge fund debt holders. Whatever anyone think of that particular investor class, it can’t be seen as a positive that issuers can decide which group of investors is worthy of fair and legal treatment. And it makes no sense to treat parties like the bond insurers in the same manner just because they are larger corporate entities.

So, it is from that perspective that we view the announcement by the Puerto Rico’s Financial Oversight and Management Board of its plan to restructure $35 billion in debt and non-debt claims of commonwealth and Public Buildings Authority creditors. The plan is to sharply reduce what is available for investors while essentially exempting the Commonwealth’s pensioners from any real pain. The 2012/2014 holders have the option to litigate for equal recovery with pre-2012 bonds, called vintage, or settle at certain levels. The 2012 GOs, which total $2.7 billion, can settle at 45% or be litigated for pari vintage recovery. The 2014 GO bondholders, which have a claim of some $3.6 billion, can settle at 35% or litigate for pari-vintage recovery. Holders of some $700 million in 2012 PBA bonds settle at 23% with net GO claim treated as 2012 GO. Vintage PBA bonds, which total about $3.9 billion can settle at 73% of the recovery.

The government was clear in expressing its position that the government will not support any proposed plan support agreement (PSA) that is based on the recently enacted fiscal plan, which calls for pension cuts. So there it is. All holders must be large holders, all of them were vultures, all of them are an excuse to walk away from responsibility. And all of this represents a corporate mentality whereby the rules of risk taking markets are applied to a risk averse market.

That’s great until one realizes that this is not the corporate market. Now Puerto Rico must face a future where its entree back into the municipal market is not clear. And if it does regain access, will it not need credit support? If it does, will the bond insurance industry be as open to exposure to the credit that treated them so poorly before? The idea that the bond insurer should be treated in the same way as a distressed buyer ignores one little point – the insurers effectively bought at par while many of the current creditors had an effective entry price into the credit of substantially less. So the bond insurers dismay is more than understandable.

It is ironic that for over 40 years potential individual investors would ask what if there’s an insurrection? The fear was of debt repudiation. Now the insurrection against debt repayment  is being generated not as much from below as it is being generated by a political establishment seeking to come out the other side of this debacle with their access to their power and relative privilege intact. They still do not appear to understand that audits and accountability matter. Just this past week, the Financial Oversight and Management Board said the commonwealth government failed to comply with the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 (Promesa) because it has yet to submit certain financial and budget reports. 

The government did not submit, when due April 15, budget-to-actual reports for the University of Puerto Rico (UPR) and the Highway and Transportation Authority (HTA) for the third quarter of fiscal year 2019, as required by Section 203(a) of Promesa. The government did not submit budget-to-actual reports for PREPA, HTA and UPR for fiscal year 2018 and asked these be submitted by the new June 30 deadline. From now on, the board said, the government will also be required to publish public quarterly Section 203(a) reports one month after they are submitted to the board.

The question is will we make them pay a price?

SURPRISE MEDICAL BILLS – SIZE WILL AGAIN MATTER?

With bills under serious consideration in Congress to limit what are known as surprise medical bills, the healthcare industry has reacted with alarm. Clearly, the practice of accepting insurance and hen trying to claw additional revenues from patients usually not in a position to m informed decisions fails many tests of equity and fairness. Surprise bills usually arise from emergency services provided to patients insured patients who inadvertently receive care from providers outside of their insurance networks.

A number of solutions are on offer. Legislative solutions include capping out-of-network charges for emergency medical services at in-network levels; or setting up an arbitration process to resolve out-of-network charges. Other legislation would require a single, “bundled bill” for all care received in an emergency room or have hospitals guarantee that all of their affiliated doctors and service providers are in-network. As usual, change presents challenges and those entities with access to more resources will be best positioned to handle them. Smaller providers are likely to have high out-of-network exposures because they are challenged to negotiate favorable in-network rates from insurers. The largest providers have significant negotiating leverage with insurers, making them likely to already be in-network.

As has been the case for the decade since the enactment of the Affordable Care Act, large providers with diverse sources of reimbursement will be best positioned to withstand changes in insurance reimbursement. The legislation is considered likely to impact hospitals, physician staffing companies, laboratories, radiology and other ancillary provider companies. There are also several proposals that would impact air ambulance providers. Overall, it will be better to be bigger going forward in the healthcare sector.

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.