Joseph Krist

Publisher

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ISSUE OF THE WEEK

$750 million

New York City Transitional Finance Authority’s (TFA)

Future Tax Secured Subordinate Bonds

Moody’s: Aa1

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

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

TFA’s original statutory authorization of $7.5 billion has been increased to $13.5 billion (plus $2.5 billion “Recovery Bonds”) for senior and subordinate lien bonds. In 2009, legislation was enacted permitting TFA to exceed the $13.5 billion cap but counts debt over that amount, along with city general obligation debt, against the city’s overall debt limit. As of July 31, 2018, the city had $35.8 billion of debt capacity.

The authorizing statute also provided for bondholder protections including the fact that the pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA’s operational costs (with the collection quarters beginning each August, November, February and May).

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PUERTO RICO

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

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

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

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

SOME VOTERS APPROVE TAX HIKES FOR SCHOOLS

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

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

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

BRIGHTLINE GETS ITS BONDS (AND THEIR SUBSIDY)

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

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

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

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

A STREECAR NAMED DE BLASIO

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

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

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

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

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

 

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

 

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$920,190,000

STATE OF ILLINOIS

General Obligation Refunding Bonds

Moody’s: “Baa3” (Stable Outlook)
S&P: “BBB-” (Stable Outlook)
Fitch: “BBB” (Negative Outlook)

The refinancing of state debt at more favorable terms is always a positive. That is not what we see as the important part of this effort to come to market. In this case, the focal point should be the nature of the disclosure included in the offering documents as it pertains to the State’s budget outlook.

From that perspective, the statement that the State has a structural budget deficit of $1.2 billion is important. While the State did enact a “balanced budget”, the level of the ongoing hurdles to be overcome to generate truly positive momentum for the State’s credit is important. The number indicates that regardless of the outcome of this November’s gubernatorial ballot, the next Governor and the Legislature have a significant road to hoe.

The structural deficit accompanies an ongoing backlog of unpaid bills estimated at $7.4 billion. So long as the State is unable to address its structural deficit the backlog will continue to serve as a significant drag on the State’s credit and ratings. In addition, the prospectus reminds investors once again of the magnitude of the State’s unfunded pension liabilities which plague not only the State but also its underlying municipalities and subdivisions. Overall the State’s unfunded liability position remains significant with an actuarial liability of $128.9 billion and a funding ration of 39.9%.

While the language dealing with factors which could potentially impact the State’s budget, we note that there is particular attention drawn in the document to the negative effects of US trade policy. Illinois, in addition to being significantly exposed to agricultural tariffs, is also impacted by tariffs on steel and aluminum which are significant manufacturing inputs to businesses in the State. In addition to raising costs of production and final products for domestic consumption, the trade war will negatively impact the State’s manufacturing sector. We take this view notwithstanding some isolated examples of manufacturing capacity being restarted in certain industries.

All of these factors place the enacted budget at significant risk of negative variance.

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GAS TAXES AND ELECTIONS

Ninety-six percent of state lawmakers who voted in favor of a gas tax increase and faced reelection in 2018 primaries will advance to the Nov. 6 general election, according to new data from the American Road & Transportation Builders Association’s Transportation Investment Advocacy Center. The 2018 primaries saw 802 legislators who voted on gas tax increase legislation from 12 states – California, Iowa, Indiana, Montana, Nebraska, Oregon, South Carolina, Utah, Oklahoma, Tennessee, Michigan and Washington – run for reelection. Of those lawmakers, 558 voted in favor of a gas tax increase and ran for reelection, with 538—or 96 percent—advancing to November’s general election.

The numbers include 97 percent of the 263 Democratic lawmakers, and 96 percent of 295 Republican lawmakers. Of the 222 legislators who voted against a gas tax increase and ran for reelection, 216—or 97 percent—will move on to November’s general election. This includes 96 percent of 52 Democratic lawmakers, and 97 percent of 170 Republican lawmakers. An additional 22 lawmakers did not cast a vote on a gas tax increase measure and ran for reelection.

Earlier findings from the advocacy group showed voting for a gas tax increase does not affect a lawmaker’s chance of reelection. In the 16 states that increased their gas tax rates or equivalent measures between 2013 and 2016, nearly all (92 percent) of the 1,354 state legislators who voted for a gas tax increase and stood for reelection between 2013 and 2017 were sent back to the state house by voters. Of the 712 elected officials who voted against a gas tax increase, 93 percent were also given another term.

The stats seem to show that excuses for not raising gas taxes over time have been just that – excuses. With a 90% success rate for advancement in the primaries occurring regardless of one’s voting record on gas taxes, it seems somewhat obvious that gas taxes just aren’t an issue. We suspect that gas tax levels matter far less than healthcare, education, and whether or not one has a job. Gerald Ford once said that the inflation rate doesn’t matter if you don’t have an income.

SEQUESTRATION TO IMPACT DIRECT PAY BONDS

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued to and refund offset transactions for certain state and local government filers claiming refundable credits under section 6431 of the Internal Revenue Code applicable to certain qualified bonds are subject to sequestration.

This means that refund payments and refund offset transactions processed on or after October 1, 2018, and on or before September 30, 2019, will be reduced by the fiscal year 2019 6.2 percent sequestration rate. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise affects the sequester, at which time the sequestration reduction rate is subject to change.

These reductions apply to Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds for which the issuer elected to receive a direct credit subsidy pursuant to section 6431.

PREPA SETTLEMENT ONLY ONE STEP

It is hard to be optimistic about the long term financial outlook for Puerto Rico. In the case of PREPA, the electric utility, a proposed settlement with debt holders generates some encouragement but reality has a way of rearing its head at inopportune times.

The latest evidence of that is The Puerto Rico Comptroller’s Office finding evidence of irregularities in the electric power company’s fuel purchasing and payments for professional service. The report establishes that in eight contracts and an amendment for the purchase of $4.6 billion worth of fuel between 2008 and 2012, the Puerto Rico Electric Power Authority (PREPA) did not include in the contracts a clause to charge interest for delays. Despite the absence of this clause in the contracts, the utility disbursed $3.3 million to the suppliers. The audit of three findings indicates that $2.3 billion in payments were made to a company that had pleaded guilty to fraud in 2006.

“The Report states that a fuel supplier that filed and paid their Monthly Tax Return to the Department of the Treasury more than two years after the term established by the Law was identified,” the comptroller said.

Puerto Rico’s electric power restoration after Hurricane María mangled the island’s grid entailed an estimated $2.5 billion. The utility is now entering a phase that consists of improving the temporary work done to put the lights back on as quickly as possible, which means outages are imminent during the coming six months. “There will be one or more blackouts in one sector or another because we have to remove [utility] poles that aren’t installed in the best way. We’re going to be notifying people in time so they know when there’ll be some [work done] to be able to change their poles to firmer ones and do a job well done.”

THUMB ON THE BRIGHTLINE SCALE?

We are more than interested in the news that current Governor and Senate candidate Rick Scott and his wife invested at least $3 million in a credit fund for All Aboard Florida’s parent company, Fortress Investment Group, according to recently disclosed financial documents. One has to wonder what impact this decision, which generates the Governor some $150,000 in annual investment income has sweetened the environment for All Aboard Florida’s plan to expand service from Orlando to Tampa.

In 2011, Gov. Rick Scott canceled a $2.4 billion federally funded and shovel-ready bullet train from Orlando to Tampa because it carried “an extremely high risk of overspending taxpayer dollars with no guarantee of economic growth.’’ Now he thinks that such a venture is “a good idea”.  The Governor’s  investments are in a blind trust but most of his and his wife investments are held in her name limiting the disclosure requirements about his investments.

This is exactly the kind of thing that clouds the municipal finance universe. It’s not the first ethically challenged investment activity for the Governor. When he ran HCA, that for  profit hospital chain paid fines in excess of $1 billion to the federal government. While all parties deny that the Scott’s investments directly benefit from the ultimate success or failure of the Brightline, it creates an unsightly perception that moves the project from the realm of sound economic development to that of politicized investing.

It all harkens back to earlier times in the US where infrastructure development was influenced by the role of various private participants and investors. One could hope that those days were behind us but in the instance that does not appear to be the case. It is no surprise that privatization and public private partnerships are viewed through a skeptical prism by so many.

SEC ENFORCEMENT CONTINUES

The ongoing efforts by the Securities and Exchange Commission (SEC) to police the municipal bond market continue. The latest charges two firms and 18 individuals in a scheme to improperly divert new issue municipal bonds to broker-dealers at the expense of retail investors.  According to the SEC’s complaint, the defendants – known in the industry as “flippers” – purchased new issue municipal bonds, often by posing as retail investors to gain priority in bond allocations. The defendants then “flipped” the bonds to broker-dealers for a fee. The SEC also charged a municipal underwriter for accepting kickbacks from one of the flippers.

Many issuers require underwriters to give retail investor orders the highest priority when allocating new issue bonds, particularly retail investors within the municipal issuer’s jurisdiction. According to the SEC’s complaint, these defendants used fictitious business names, falsely linked their orders to ZIP codes within the issuer’s jurisdiction, and split orders among dozens of accounts. After acquiring the bonds, the SEC alleges that the defendants quickly resold them to broker-dealers, typically for a fixed, pre-arranged commission, and often sought to hide the flipping activity from issuers and underwriters by manipulating sales tickets.

Fifteen individuals charged settled the SEC’s charges without admitting or denying the allegations, agreeing to injunctions, to return allegedly ill-gotten gains with interest, pay civil penalties, be subject to industry bars or suspensions, and to cooperate with the SEC’s ongoing investigation. Three individuals face criminal proceedings.

The continued vigilance of the agency under the current administration is an overall positive for the market. With infrastructure demands increasing almost daily it is important that the municipal market be able to appeal to the widest range of investors. These efforts will help to increase the long-term attractiveness of the market to potential investors whether they be individuals seeking tax sheltered income or to non-traditional institutional investors looking to enter the market for the first time.

SOUTH CAROLINA PUBLIC SERVICE AUTHORITY DOWNGRADE FINALLY COMES

Moody’s Investors Service has downgraded the rating on the South Carolina Public Service Authority (Santee Cooper) revenue bonds to A2 from A1. The rating action is based on  consideration of the continued unstable governance with uncertainty about future rate setting as Santee Cooper operates without a board chairman. The downgrade also reflects the very high leverage that will persist for many years owing to the termination of the Summer Nuclear project which has introduced cost recovery challenges to Santee Cooper, particularly in the near-to-medium term. Another consideration in the downgrade is the continued uncertainty about the ultimate outcome of the litigation brought by Central Power Electric Cooperative (Central), Santee Cooper’s major wholesale customer that provides more than 60% of its revenues.

No legislative action was enacted in the 2018 session which curtails the Santee Cooper board’s unregulated authority to establish rates and charges to meet bond covenants in a timely manner. An existing state statute prohibits the state from doing anything including enacting new laws that would impact bond covenant compliance. An additional factor in favor of the rating is the fact that Santee Cooper does not have to immediately replace the planned Summer addition with a new generation. This would lead the fact that Santee Cooper does not have to immediately replace the planned Summer addition with a new generation. This would lead to an even more unfavorable debt profile which would further increase downward pressure on the rating.

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

CITY AND COUNTY OF DENVER, COLORADO

FOR AND ON BEHALF OF ITS DEPARTMENT OF AVIATION

AIRPORT SYSTEM SUBORDINATE REVENUE BONDS

$2,200,000,000

The issue will provide financing for the public private partnership undertaking the renovation and reconfiguration of Denver International Airport. It is hard to believe that DIA opened in 1995 but the passage of time, increased security issues, and ever increasing passenger volumes have led to the plan to update the main terminal at the airport.

Major components of the project include: Enhancements to security by removing today’s exposed checkpoints on level 5; Increased Transportation Security Administration (TSA) throughput; Increased capacity and life of the terminal for the future, allowing the airport to grow its operations in the terminal and concourses to match increasing passenger demand; Better utilization of airline ticket spaces, including increased check-in counter space; An upgraded meet and greet area at the south end of the terminal, and a new “front door” to the airport, including a children’s play space and flight info displays; Improved food and retail offerings throughout the Jeppesen terminal; Curbside improvements for increased passenger drop-off capacity, including a quick drop-off location directly at the TSA checkpoints.

The Jeppesen Terminal was built to serve only 50 million annual passengers, and it served over 58 million passengers in 2016. TSA checkpoints are at capacity. The airport also has an underutilized and inefficient ticket lobby space and is lacking the adequate amount of concessionaires to accommodate projected passenger growth. Today, DEN has 30 standard checkpoint lanes that accommodate about 4,500 passengers per hour. The Great Hall project will include 34 state-of-the-art automated screening lanes, which can each serve an estimated 8,500 passengers per hour.

The P3 established for this project (The Great Hall Partners) is comprised of Equity Partners:  Ferrovial Airports International Ltd., JLC/Saunders joint venture, which includes Saunders and Magic Johnson Enterprises & Loop Capital. The Design & Build partners: Ferrovial Agroman and Saunders Construction, Inc. The Architects: Luis Vidal + Architects, Harrison Kornberg Architects and Anderson Mason Dale. Local Engineers/Contractors: Intermountain Electric, Civil Technology, Gilmore Construction, Sky Blue Builders. Equity Partners Legal Advisors: Gibson, Dunn & Crutcher.

The City and the airport still maintain the ownership and the private partner is in a long-term lease. The Great Hall Partners were granted an exclusive license to develop and manage terminal concessions and will contract directly with individual concession operators. The agreement requires that 70 percent of concession locations must be competitively procured; so existing concessionaires will have the opportunity to bid on concession opportunities in the terminal area.

The initial plan calls for the project to be completed in four main construction phases. Phase one of the project will primarily focus on work in Mod 2, east and west, including airline ticket lobbies, baggage claim areas, the food court (which will be demolished), as well as the area of the A bridge from the terminal to the Airport Office Building, Phase two will focus on Mod 3, with similar ticket lobby and baggage claim area work. Phase three will be in Mod 1, preparing for the current Mod 1 ticket counters for conversion into new passenger security screening area, and the final phase will entail work in the tented space of the terminal on level 5, along with median and curbside work on level 6 on both the east and west sides of the terminal. Milestones for the project include opening of the ticket counters in early 2020, opening the checkpoints in late 2020, and the entire project will complete in late 2021.

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PR MOVES TO SETTLE COFINA DEBT

The news that the government and a number of bondholders reached a deal to restructure the instrumentality’s debt secured by sales taxes (the COFINA debt) was generally greeted favorably. Contrary to many who postulated that the sales tax debt had been legally structured to be immune to the travails of the general obligation debt, the proposed settlement will require COFINA debt holders to take a substantial haircut. The deal provides for more than a 32% reduction in COFINA debt, providing Puerto Rico about $17.5 billion in future debt-service payments.

It provides for 53.65% of the Pledged Sales Tax Base Amount (“PSTBA”) cash flow through and including 2058 to be dedicated to the new COFINA bonds which are proposed to be issued to the debt holders. The new bonds will result effectively in an extension of maturity (no surprise). The new debt will come in the form of both current interest and capital appreciation bonds.

As it exists now, the proposal allows the issue of final judicial review of the strength of the statutory lien of COFINA bonds against the constitutional lien which the general obligation bond holders contend supersedes it. Because this point has yet to be adjudicated, we expect that general obligation bondholders will seek to intervene in the proceedings and to challenge the claim on revenues by COFINA bond holders.

We do not pretend to know how this conflict will eventually be resolved. It has long been our view that a constitutionally established lien is stronger than a statutory lien. We understand why the Commonwealth did not seek to have the lien judicially validated (it very well might not have been upheld) but it is not as clear why investors did not consider the issue of a statutory vs. a constitutional lien. Regardless of the outcome, our view is that the issue validates our long held belief that economics always trump legal provisions if one wants to feel secure in one’s investment.

One market cohort which is undoubtedly pleased by the terms of the proposed settlement is the monoline bond insurers. National Public Finance Guarantee Corporation is estimated to have nearly $1.2 billion of par exposure to COFINA senior bonds. Assured Guaranty Municipal Corp. is estimated to have $264 million of net par exposure to subordinate COFINA bonds. Moody’s estimates that National will incur ultimate losses on its total COFINA insured debt service obligations of around $80 million on a present value basis, while AGM’s will be around and $130 million.

NORTH CAROLINA TAX CAPS

North Carolina’s allowable maximum income tax rate is currently 10%. The state moved to a flat tax rate of 5.8% in 2014. On Jan. 1, 2019, the state budget lowers the personal income tax rate to 5.25% from 5.499%. Now, the legislature has approved initiatives to be submitted to the voters this November which would “limit future, legitimately-elected legislatures’ power to set state income tax rates higher than 7%, which could limit funding for programs.

The action comes as multiple studies have been released which raise issues of equity among various income cohorts which result from the establishment of taxing limitations. In addition, North Carolina’s politics have become substantially more partisan and polarized. This has led to the filing of a lawsuit by the Governor of North Carolina against, among others, the President pro Tem of the Senate and the Speaker of the House in North Carolina.

The Governor seeks to have the initiatives annulled as violations of the separation of powers. The Governor charges that the initiatives were crafted for the purpose of deceiving the electorate. He is concerned that the proposed amendments could allow the legislature to enact laws which then had to be enforced by the Governor even if he vetoed them. The proposed veto exception for judicial vacancy bills is not expressly limited to bills on that subject “and containing no other matter.”

LONG RELIEF FOR THE YANKEES GARAGE

Since Opening Day of 2009, the new Yankee Stadium has been the home of the 26 time world champions. While their performance on the field has been generally favorable, the financial performance of the garage at Yankee Stadium has been seriously deficient. There have been a variety of proposals made for development which might provide revenues to support a restructuring of the bonds issued by the New York Industrial Development Corporation.

The bonds were issued in 2007 on behalf of the Bronx Development Corporation (BDC). The garage is the only asset pledged as security for the bonds and the only source of revenues. From the start, below expected demand has been a constant feature of operations. This, coupled with a high $35 per game parking fee, served to permanently suppress demand as the Stadium is quit accessible via public transportation.

Now the other tenant at Yankee Stadium, Major League Soccer’s New York City FC, may be part of a solution to the financial conundrum faced by the BDC. The is a four-level parking structure that sits immediately south of the old stadium site. The garage along with two other structures would be demolished to create a roughly eight-acre plot of land just big enough to squeeze in a soccer-specific stadium.  The city would sell or lease it to a private developer. The developer would sublease the garage site to NYCFC, which would erect on it a 26,000-seat, $400 million soccer stadium.

Certainly enough moving parts are here to interest investors. One wild card (the Yankees are competing for that spot) is that the garages only become available if the Yankees agree to lift the requirement, agreed to in 2006, that the city provide a minimum of 9,500 parking spaces for fans — a provision that even the team owners no longer care about, but which they can decline to do away with unless the city agrees to use the garage property for a project of their liking.

One thing in favor of the project going through – NYCFC is owned by the Steinbrenner family and Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan.

CA JULY REVENUE UPDATE

During the first month of the 2018-19 fiscal year, California took in less revenue than estimated in the budget enacted at the end of June according to the State Controller. Total revenues of $6.63 billion for July were lower than anticipated by $294.7 million, or 4.3 percent. While sales taxes missed the mark, personal income tax (PIT) and corporation tax – the other two of the “big three” revenue sources – came in higher than projected.

For July, PIT receipts of $5.22 billion were $231.7 million, or 4.6 percent, more than expected. July corporation taxes of $446.4 million were $82.2 million, or 22.6 percent, above 2018-19 Budget Act assumptions. Sales tax receipts of $818.4 million for July were $659.1 million, or 44.6 percent, less than anticipated in the FY 2018-19 budget. Most of the variance was due to when the money was recorded.

At the beginning of FY 2018-19, the state’s General Fund had a positive cash balance of $5.54 billion. Receipts were $3.62 billion less than disbursements in July, which left a cash balance of $1.92 billion at the end of the month. There was no internal borrowing, which was $2.19 billion less than the 2018-19 Budget Act estimated the state would need by the end of July. Unused borrowable resources were 7.5 percent higher than projected in the budget.

NEW YORK STATE SALES TAX GROWTH

Sales tax revenues in New York secure a variety of debt issues in the state. So it is good news that the State Comptroller’s Office announced that first-half of calendar year 2018 sales tax collections grew 6% over 2017, the highest six-month increase since 2010. In addition to individual bond issues, sales taxes are a significant revenue source to local governments across the State. They are also a good current indicator of the trend of economic activity. Sales tax growth was strong in virtually every region of the state.

The Comptroller cited a number of factors to account for this strong growth trend. They include low unemployment (the lowest in more than a decade), improved consumer confidence, steady wage growth and the highest inflation rate since 2011. Also driving the increase, particularly in counties bordering Pennsylvania, was increased collections of motor fuel tax. The comptroller noted that this was likely because of gas prices being lower in New York than in neighboring Pennsylvania.

The trend becomes more solid when viewed in the context of where sales tax revenues are generated. New York City has a strong tourist economy which lends itself to relatively outsized sales tax revenues. It is telling that counties which do not rely on tourism also exhibited strong growth lending credence to the view of a strong and expanding economy.

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

$366,250,000

California Statewide Communities Development Authority

Revenue Bonds

Loma Linda University Medical Center

The Medical Center comes to market fresh on the heels of a rating downgrade from Fitch to BB from BB+. The bonds are secured by a gross receivables pledge and mortgage pledge of the obligated group (OG). There are also debt service reserve funds. The OG includes LLUMC, LLU Children’s Hospital, LLUMC – Murrieta, and Loma Linda University Behavioral Medicine Center. The OG accounted for almost all of the consolidated system assets and revenues.  The increasing leverage being added to the Medical Center’s already highly leveraged balance sheet is the primary basis for the downgrade.

The capital program began over a year ago. The project includes two new patient towers on a shared platform (16-story adult tower and 9-story children’s tower) with all private rooms, expanded and separate emergency rooms, expanded neonatal intensive care unit and birthing center, 16 new operating rooms (five additional), enhanced diagnostic imaging services and cardiovascular labs. The project will result in 983,000 square feet of new space with a total capacity of 693 licensed beds (320 adult and 377 children’s) once the shelled space is built out for the additional 60 beds.

LLUMC is located 60 miles east of Los Angeles in Loma Linda, CA. It operates a total of 1,077 licensed beds: University Hospital (371), East Campus Hospital (134), Surgical Hospital (28 bed) (all three share a license and are located on the main campus), Children’s Hospital (343 beds), Behavioral Medicine Center (89-bed facility in Redlands) and LLUMC- Murrieta Hospital (112 beds in Murrieta). LLUMC offers quaternary and tertiary series and has the only level I trauma center and level IV neonatal intensive care unit in the service area of the Inland Empire (San Bernardino and Riverside counties). University Hospital and Children’s Hospital are undergoing a capital intensive campus transformation project which will also address state-mandated seismic requirements that go into effect on Jan. 1, 2020, although the project is a year behind schedule and will require an extension from the state legislators.

LLUMC’s market share in its service area, the Inland Empire, was stable in 2016 after slight growth between 2012 and 2015. While not leading the service area market share, LLUMC offers a greater depth and breadth of quaternary and tertiary services with the only level-I trauma center and level-IV neonatal intensive care unit in the service area. Its role as a major provider of children’s services is a double edged sword. It drives utilization but increases its dependence upon Medicaid. Medicaid currently represents approximately 41% of gross revenues and 32% of net revenues. LLUMC is a major beneficiary of California’s HQAF program. HQAF provides supplemental Medi-Cal payments to hospitals that are net recipients of the hospital provider fee program; however, there is a lag in payment receipts after the pertaining services are provided.

The service area is competitive. LLUMC’s market share in the Inland Empire was 11% in 2016 and the next closest competitor, Kaiser-Fontana, had a 7.2% market share. However, Kaiser has several facilities in the area and Kaiser’s combined market share in the region was 12%. Other leading competitors in this service area include UHS (8.1%), Tenet (7%), and Dignity Health (6%).

LLUMC reported a 10.9% operating margin and 16.1% operating EBITDA margin in the nine-month statements of fiscal 2018 (ended March 31) partly due to the recording of additional net program benefits. Operating improvement in fiscal 2018 has been driven largely by initiatives to reduce length of stay and cost management.

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SAN DIEGO GETS BAD NEWS ON PENSION REFORM

The six year old pension reform program undertaken by the City of San Diego was overturned by the California Supreme Court last week. The court ruled that the plan was not legally placed on the ballot because city officials failed to negotiate with labor unions before pursuing the measure. The court ordered the appeals court to take the case back and evaluate the state labor board’s conclusion that 4,000 employees hired since pensions were eliminated must receive compensation that would make them financially whole.

The ruling sends the case back to  the appeals court and directs that court to enact “an appropriate judicial remedy” for the city’s failure to follow the legally required steps before placing the measure on the ballot. The city has said that the only way to do that would be to invalidate the ballot measure and nullify the pension cuts. The measure was approved by more than 65% of city voters. It replaced guaranteed pensions with 401(k)-style retirement plans for all newly hired city employees except police officers.

At the time of the vote, the then mayor of the City took a leading role in promoting support for the initiative. The fact that the mayor took such a public role in supporting it became a key factor in the court’s decision. The mayor maintained that he supported the measure only as a citizen, not as mayor, and as a result negotiations with unions were not required. The Court found that his interpretation of his role was incorrect and that he was obligated to meet with the unions before placing the measure on the ballot because he used his power and influence as mayor to support the measure.

The mayor relied on legal advice he received but acknowledged he should have handled things differently. The ruling reinstates a 2015 decision by the state labor board that concluded the city was legally required to conduct labor negotiations before placing Proposition B on the ballot. The board then ordered San Diego to make employees hired since 2012 whole by compensating them for the loss of pensions and paying them interest penalties of 7%. Estimates of how much that would cost the city have ranged from $20 million to $100 million.

It is important to note that the Court only ruled on the procedural issue. It noted that it was not ruling on the  pension cuts. “We are not called upon to decide, and express no opinion, on the merits of pension reform or any particular pension reform policy.”  San Diego is the only city in California to discontinue pensions for new hires. The ruling also bolsters the role of the employee union and is notable in that it follows fairly closely the US Supreme Court ruling in the Janus case which is seen as a negative for unions.

PUERTO RICO

The Financial Oversight and Management Board for Puerto Rico has published its second annual report to the U.S. president, Congress and the governor and legislature of Puerto Rico, as required by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). The review period includes the aftermath of Hurricane Maria.  “Immediately after Hurricanes Irma and Maria struck, the Oversight Board provided the Government with the flexibility to reapportion up to $1 billion in budgeted expenditures to cover disaster related expenses. The Oversight Board also worked with the Government to forecast the liquidity needs of the Government in the months ahead, which eventually led to Congress providing Puerto Rico with access to specialized forms of Community Disaster Loans to offset the projected revenue shortfalls caused by the hurricanes.”

The report documents the impasse with the government encountered by the Board.  “The Government initially rejected the most critical component of labor reform – changing the law of Puerto Rico to make it an at-will jurisdiction for private sector employees like 49 of the 50 states.”  “While this fiscal plan contains many of the fiscal measures necessary to rightsize the Government, it contains only those structural reforms that the Government agreed to implement, such as ease of doing business and energy reform, but not comprehensive labor reform because of the Legislature’s failure to pass the requisite legislation.

In addition, the report includes several recommendations from the Board. It requests federal support with Medicaid and Medicare by legislating a “long-term Medicaid program solution to mitigate the drastic reduction in federal funding for healthcare in Puerto Rico that will happen next year,” as well as providing “fair and equitable treatment to residents of Puerto Rico in all Medicare programs.” It also suggests special provisions be increased to enhance Puerto Rico’s attractiveness for investments in the U.S. Tax Code’s Opportunity Zone (OZ) rules, such as for property acquired from the Puerto Rico Government, extending the time in which an OZ fund must invest in Puerto Rico, providing “special basis rules for investors that invest in a Puerto Rico OZ Fund,” and reducing the holding period applicable to an investment in a Puerto Rico OZ Fund.”

The Board also reiterated “the long road ahead for Puerto Rico but is resolute in fulfilling its mission of helping Puerto Rico to achieve fiscal responsibility, regain access to capital markets, restructure its outstanding debt, and return to economic growth.”

MORE CHICAGOLAND CREDIT IMPROVEMENT

Moody’s continued its moves to improve the outlooks for ratings for a variety of credits in and around the City of Chicago. The latest beneficiaries are the Regional Transportation Authority (RTA) and the Chicago Transit Authority (CTA). Moody’s has revised the outlook on the Regional Transportation Authority’s (IL) sales tax revenue bonds to stable from negative, while affirming the bonds’ A2 rating. This affects $1.6 billion out of the Authority’s $2.2 billion outstanding debt. The outlook change is based on the recently stabilized credit positions of key related governments, Illinois and Chicago. With solid economic trends in Chicago and its surrounding suburbs, pledged regional sales tax collections will tend to increase, supporting RTA’s credit position for the next one to two years.

RTA’s debt is secured by liens on sales tax imposed by the RTA in its service area and on matching payments from the state’s Public Transportation Fund (PTF). The sales taxes are levied at various rates throughout the region. In Cook County (A2 stable), for example, the tax rate for general sales tax is 1%, while the tax on drugs and prepared food is 1.25%. Collar county general sales are subject to a 0.5% RTA tax. Unlike some state obligations supported by revenue collected by the state’s Department of Revenue, the RTA benefits from a primary source that is separated from the state government’s operations, flowing directly to a trust account held for RTA outside the state treasury. The payment of regional taxes has generally not been subjected to budgetary deliberations or to deferral, and it does not require legislative appropriation for payment. Fare-box collections of the RTA’s service boards are not available for payment of debt service.

Moody’s Investors Service has revised the outlook for bonds issued by the Chicago Transit Authority to stable from negative, while affirming the ratings at current levels (A3). The same factors justifying the improvement in the RTA rating outlook were cited to support the CTA outlook change. CTA’s sales tax revenue bonds are secured by CTA’s Sales Tax Receipts Fund (STRF), which receives transfers of RTA sales tax revenues and the state’s PTF matching payments. CTA’s sales tax and PTF revenues that exceed debt service requirements are released for operations. These revenues are allocated under a statutory formula and are transferred by RTA after it has satisfied debt-service requirements on its own sales-tax secured bonds. The CTA’s bonds therefore are in effect subordinate to the RTA bonds.

An exception to this subordination is that the CTA’s 2008 retirement benefit-funding bonds, the largest share of CTA’s outstanding sales-tax revenue bonds, are additionally secured by Chicago real estate transfer tax (RETT) payments. The RETT revenues are deposited in the Transfer Tax Receipts Fund. The CTA’s share of RETT is assessed at a rate equal to $1.50 per $500 under legislation passed in connection with the 2008 bonds. RETT revenues have averaged about $67 million in the past five fiscal years.

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

THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE

CITY OF MARYLAND HEIGHTS, MISSOURI

$50,250,000

Revenue Bonds

$5,400,000*

Subordinate Revenue Bonds

(Saint Louis Community Ice Center Project)

Ice skating facilities have a relatively poor credit history in the municipal bond market. Regardless of the involvement of a variety of public and private entities, many bond financed facilities have failed to reach projected levels of demand. This has produced a number of defaults which have troubled municipalities and challenged them to provide financing through either initial funding agreements or restructurings.

In spite of this checkered history for these projects, the City of Maryland Heights, MO is undertaking the financing of a new ice facility in the City through the issuance of bonds. The non-rated bonds are intended to be repaid from operating revenues and a pledge of sales tax dollars generated by economic activity in a Community Improvement District.

A variety of private interests are supporting the project including a hotel casino located within the boundaries of the community improvement district as well as the St. Louis Blues NHL hockey franchise. The Blues are a popular team which has enjoyed strong fan support and the community is considered to be a major source of junior hockey participation and interest. a number of current NHL players were initially developed through local St. Louis youth hockey programs.

This proposed deal will be secured by proceeds of a 1% sales tax collected within the District beginning January 1, 2019. Risks to the transaction include construction risk in addition to operating risk and dependence upon economically sensitive sales tax revenues. A mortgage on the facility will be offered to secure the debt.

Nonetheless, many unsuccessful facilities have offered similar profiles – the support of a local professional team and strong interest in youth hockey. This deal does attempt to address many of these historic hurdles to successful ice projects. It will employ a professional manager which does e have experience in the local market, sponsorship agreements providing revenues, and provisions for events unrelated to hockey including concerts.

In any event, the bonds are planned to be sold only to “qualified investors” but that does not prevent them from being placed into high yield bond funds which means that individuals will wind up having these bonds securing their investments. Caveat emptor!

 

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VIRGIN ISLANDS

The US Virgin Islands will move forward with the reopening of the former Hess/HOVENSA owned oil refinery now that the Legislature has approved an agreement last week with ArcLight Capital Partners’ Limetree Bay to operate the facility. The refinery had historically been an important revenue source for the USVI government as well as the source of some 1200 jobs on the island of St. Croix. In the wake of Hurricane Maria, a way to recreate many of those jobs was an important part of the post-Maria recovery plan.

The plan as approved by the Legislature was not all that had been hoped for by the Governor of the USVI. He had wanted revenue received by the government from the project to be dedicated to the USVI’s significantly underfunded public employee pension plan. The pension plan in the 2017 fiscal year had about $4.7 billion less than it needs to cover all the benefits that have been promised, according to the Government Employees’ Retirement System, and is projected to run out of money as soon as 2023. The Legislature did not include the revenue dedication in its approval.

The appropriation of the funds will be determined through negotiations between the Governor and the Legislature. ArcLight Capital will make a $70 million payment to the Virgin Islands government upon finalization and implementation of the agreement. It will continue to make annual payments ranging from $14 million to $70 million, based on the performance of the refinery.

The deal is positive for the USVI credit in that it will provide increased revenue as well as replacement of an estimated 700 of the jobs lost to the economy when the refinery closed.

AURORA ADVOCATE HEALTH SYSTEM

Whenever two health systems merge, there is always ratings risk associated with the endeavor. In April, Aurora Health merged with Advocate Health to create a new substantial regional health provider serving portions of Illinois and Wisconsin. AAH now provides a continuum of care through its 25 acute care hospitals, an integrated children’s hospital and a psychiatric hospital, which in total have 6,563 licensed beds, primary and specialty physician services, outpatient centers, physician office buildings, pharmacies, behavioral health care, rehabilitation, home health and hospice care in northern and central Illinois, eastern Wisconsin and the upper peninsula of Michigan.

The merger impacted the ratings of the outstanding debt of both entities. For those who own debt from Advocate, the impact was negative. Debt formerly rated Aa2 will now be rated Aa3. Debt from Aurora was upgraded from A2 to Aa3. The rating incorporates challenges including integration risk, especially as it relates to realignment of management and governance, fierce competition in rapidly consolidating markets and noted revenue slowdowns attributable to pricing pressure and unfavorable payer mix shifts, particularly in the Illinois region.

The rating also is based on the size and scale Advocate Aurora will have as a market leader over a large geographic service area, potential to capitalize on synergies related to core infrastructure, purchasing and materials management, a strong liquidity position as measured against expenses and financial leverage, both legacy organization’s demonstrated history of successful operations and absorption of growth, and anticipated savings that will be achieved from the debt refinancing.

Security will be a general, unsecured obligation of the obligated group. There is no additional indebtedness tests. The members of the obligated group under the Master Indenture will be: Advocate Aurora Health, Inc., Advocate Health Care Network,  North Side Health Network, Advocate Condell Medical Center, Aurora Health Care, Inc., Aurora Health Care Metro, Inc., Aurora Health Care Southern Lakes, Inc., Aurora Health Care Central, Inc. d/b/a Aurora Sheboygan Memorial Medical Center, Aurora Medical Center of Washington County, Inc., Aurora Health Care North, Inc. d/b/a Aurora Medical Center Manitowoc County, Aurora Medical Center of Oshkosh, Inc., Aurora Medical Group, Inc., Aurora Medical Center Grafton LLC.

LOW INCOME TOLL RELIEF IN VIRGINIA

The area around the cities of Norfolk and Portsmouth are best known as the locations for major US Navy facilities. While these facilities provide a significant economic base, not all of the region’s residents benefit. The two cities have poverty rates that hover around 20 percent, above the national rate and well above the average in Virginia. Nearly half of the residents in both cities spend at least 30 percent of their income on housing costs. So an agreement to have a private operator run two tunnels between the two cities – an agreement that allows the private operator to levy tolls for use of the tunnels has been viewed as an economic hardship for some who travel  between the two cities.

Some 115,000 cars that cross the river between the two cities each day through the either the Downtown or Midtown tunnel. Tolls were put into place in early 2014 under an agreement between Elizabeth River Crossings and the Virginia Department of Transportation that also involves repairs and additions to the tunnels. Each car that passes through either tunnel pays at least $1.73 – up to $5.53 during peak hours without E-Z Pass – each way.

A recent study found that tolls accounted for a 13% decline in annual traffic volume through the two tunnels between 2013, the last year before the tolls were implemented, and 2016. It estimates that the tolls deterred $8.8 million of taxable sales from Portsmouth in 2017, which amounts to nearly $500,000 in lost tax revenue for the city.

Recently, former Governor Terry McAuliffe  brokered an agreement between state government and Elizabeth River Crossings, the private company that manages the tunnels. Through the Virginia Toll Relief Program developed by the Virginia Department of Transportation, Elizabeth River Crossings pledged $5 million in toll rebates to low-income individuals over a span of 10 years.

Eligible individuals must reside in Norfolk or Portsmouth, earn no more than $30,000 each year and cross through the Elizabeth River tunnels at least eight times per month. Using an EZ Pass, a 75-cent credit per trip – between a 13.6 and 43.4 percent discount that adds up to about $30 per month – is refunded to the accounts of enrolled participants after each eighth trip.

2,100 people enrolled in the program in its inaugural year. That increased to just over 3,000 in year two, with two-thirds of enrollees residing in Portsmouth and one-third in Norfolk. For P3 projects to gain acceptance where they involve formerly free facilities, innovative programs to address the concerns of less well off users will likely grow in importance. They are emerging at the same time that discount programs for low income users of public transport systems are growing in major municipalities across the country.

CHICAGOLAND RATING UPGRADE

S&P Global Ratings raised its rating to ‘B+’ from ‘B’ on the Chicago Board of Education’s outstanding unlimited-tax general obligation (GO) bonds. The outlook is stable. S&P cited “the board adopting a balanced budget for fiscal 2019 when accounting for management’s articulated plan to close a small $59 million initial gap and the state adopting a fiscal 2019 budget that includes the promised higher state aid revenue as a result of Illinois’ new evidence-based funding formula (EBF), along with estimates for fiscal 2018 indicating an operating surplus and a resulting positive fund balance.”

Other positive factors include Continued evidence that the board has improved its cash and fund balance position (by an estimated $575 million), reduced reliance on lines of credit (by $455 million), and  notable wins for the board in 2017 from the state now picking up more of the employer pension contribution and the board’s authority to extend a higher property tax levy to support that contribution.

The outlook was raised to positive in April of this year. At that time, S&P said the rating could be raised by one notch after further evidence of increased state funding for fiscal 2018, fiscal 2018 estimates showing a surplus result and a positive fund balance, the board adopting a balanced fiscal 2019 budget, the state adopting a fiscal 2019 budget that included full EBF funding, and the cash flow continuing to show improvement in line with or better than projections—all of which have occurred.  a higher rating is precluded at this time given increased operational costs (over 9% increase from fiscal 2018 projections, a 5% increase from the fiscal 2018 amended budget) spending and the affordability of capital spending in fiscal 2019 and beyond, special education spending pressures, and unresolved sexual harassment scandals and lawsuits.

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

$850,000,000

New York City Transitional Finance Authority (TFA)

Future Tax Secured Subordinate Bonds

Fiscal 2019 Series A

Moody’s: Aa1

New York City comes back to the market in size with subordinated future tax secured debt. The issue carries a high rating despite its subordinate status. High debt service coverage is provided by the pledge of City of New York personal income tax and sales tax revenues, a strong legal structure that insulates TFA from potential city fiscal stress, the open subordinate lien that permits future leverage of the pledged revenues, and New York State’s ability to repeal the statutes imposing the pledged revenues. We do not expect that the State will ever choose to do the latter.

The state legislature established TFA as a separate and distinct legal entity from the city. Further, the state did not grant TFA itself the right to file for bankruptcy. The city has covenanted not to exercise its bankruptcy rights related to personal income taxes if debt service coverage would fall below 1.5 times MADS on outstanding bonds. TFA’s original statutory authorization of $7.5 billion has been increased several times to $13.5 billion (plus $2.5 billion “Recovery Bonds”) for senior and subordinate lien bonds. In 2009, legislation was enacted that allows TFA to exceed the $13.5 billion cap but counts debt over that amount, along with city general obligation debt, against the city’s overall debt limit.

Mechanics of the security are strong. The pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA’s operational costs (with the collection quarters beginning each August, November, February and May). Half of each quarterly set-aside is made beginning on the first day of the first month of each collection quarter and the second half is made beginning on the first day of the second month of each collection quarter. If sufficient amounts for debt service are not on deposit after those two months, the trustee continues to set aside funds in the third month, on a daily basis, until the deficiency is cured.

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NEW JERSEY SPORTS BETTING REVENUE

Sports betting is underway at four locations in the state with commencement on June 14. The New Jersey Division of Gaming Enforcement has released tax data for the first month of operations. Sports Wagering commenced at Monmouth Park and Borgata on June 14, 2018 and Ocean Resort on June 28, 2018. Hard Rock and Ocean Resort commenced limited soft play on June 25, 2018 and opened to the public on June 27, 2018. Hard Rock commenced Internet gaming operations on June 28, 2018.

Sports Wagering Gross Revenue, which commenced June 14th, was $3.5 million for the month. For the month of June 2018, the Racetrack Economic Development Tax of 1.25% of racetrack sports wagering gross revenue was $28,490.

A recent Pew study purports to show that taxes like this are not a magic bullet for state finances. While lawmakers are enticed by taxes on gambling, revenue growth from newly legalized casinos and “racinos” (casino-racetrack hybrids) tends to be short-lived. Competition is a significant contributing factor, suggesting that as more states legalize these activities, states already collecting gaming revenue could see further erosion in these tax streams.

Pew notes that “for all the attention they garner, sin taxes typically represent a small portion of state revenue. In 2015, they made up just over 2 percent of total state revenue. That year, sin taxes accounted for 12 percent of Nevada’s revenue, the highest share in the nation. In North Dakota, however, they made up less than 1 percent. In real dollars, alcohol and tobacco raised $25 billion in state tax revenue nationwide in 2016. Gambling accounts for roughly the same amount: In 2015, the most recent year for which data are available, lotteries, casinos, and racinos generated almost $28 billion for states.”

DETROIT’S PROBLEMS HAVE NOT MAGICALLY DISAPPREARED

The recent announcement that a proposed bond-financed regional transit plan for the Greater Detroit metropolitan area was not approved for the November ballot brings into focus the regional divide which has and continues to plague the City of Detroit as it continues its process of recovery from bankruptcy in 2014. Recent announcements of an end to state oversight and news about redevelopment efforts in the City have encouraged thought among some that the City’s travails are over. The reality is that while the City is out of bankruptcy, it still faces significant obstacles to restore its place as the thriving center of this significant metropolitan area.

The plan needed to have a unanimous “yes” vote Thursday in the Funding Allocation Committee, but Oakland and Macomb counties voted it down. It was called “Connect Southeast Michigan,” and it called for a 1.5 mill property tax levy on Wayne, Washtenaw, Oakland and Macomb counties.

The millage was projected to raise $5.4 billion over 20 years to fund expanded regional transit service and plan forward flexible transit innovations as technology changes the transportation and mobility industries. The average house in the RTA region is worth $157,504, meaning it would cost $118 a year, or less than $10 per month.

Connect Southeast Michigan would also leverage an additional $1.3 billion in farebox, state and federal revenues for Southeast Michigan. Opposition was framed as being based in a perception that non-Detroit residents would have been subsidizing Detroit residents. We suspect that there is more to it than just tax policies. We suspect that the old race based issues which stimulated flight out of Detroit to near suburbs like Oakland and Macomb continue to rear their heads.

This type of thinking has stymied the development of regional solutions to many of metropolitan Detroit’s problems over the last half century.

WHILE MICHIGAN COUNTIES GET A NEW FINANCING TOOL

Moody’s Investors Service has assigned an initial Aa3 rating to a newly established enhancement program, the Michigan Counties Distributable State Aid Intercept Program. This program covers bonds that are secured by a county’s receipt of state aid, a pledge that also carries a statutory lien and interest in a statutory trust established for the benefit of bondholders. Further, the state treasurer is party to an agreement by which a county’s appropriated state aid will be paid directly to a bond trustee. Debt service payments will then be set aside by the trustee before state aid is made available for general county operating purposes.

The Michigan Counties Distributable State Aid Intercept Program reflects a programmatic rating established by Moody’s to assess bonds issued and secured by a county’s allocation of state shared taxes. Pursuant to Act 34, Public Act of Michigan, 2001, counties may issue unvoted debt secured by state revenue sharing payments under the Glenn Steil State Revenue Sharing Act of 1971 (Act 140). The programmatic rating further incorporates the use of statutory authority provided under Act 140 to direct the state treasurer to remit all DSA payments to a trustee to meet set-aside obligations on debt service.

ILLINOIS OUTLOOK UPGRADE CHICAGO ON STABLE STATUS

Moody’s Investors Service has revised the outlook on the State of Illinois to stable from negative. The action reflects expectations that, despite continued under-funding of pension liabilities, any credit deterioration in the next two years will not affect the state’s finances, economy, or overall liabilities to an extent sufficient to warrant a lower rating. The current Baa3 rating reflects Moody’s view of substantial credit strengths – sovereign capacity to raise revenue and reduce expenditures, and a broad, diversified tax base – as well as increasing challenges from fixed costs attributable to employee pension and retirement health benefits.

The improvement in the State’s outlook accompanies actions which saw the affirmation of the Baa2 and Baa3 ratings on the city’s senior and second lien sewer revenue bonds, respectively. Concurrently, the outlook has been revised to stable from negative. The ratings apply to $10 million of senior lien water revenue bonds, $1.3 billion of second lien water revenue bonds, $35 million of senior lien sewer revenue bonds and $1.3 billion of second lien sewer revenue bonds. The city’s senior lien water rating is three notches above the GO rating given that the water system’s service area extends well beyond the city’s boundaries. The ratings also consider the nature of the water and sewer systems as enterprises of the city, the City Council’s authority to adjust rates and the expectation that growing revenue needs of the city government and overlapping units of government could limit the capacity, both practical and political, to implement considerable adjustments if needed.

STOCKBRIDGE GA DEANNEXATION

The legal battle to prevent the de-annexation of land from the City of Stockbridge, GA completed its first round in Henry County Superior Court. A judge ruled that two bills signed by Gov. Nathan Deal in May – one cutting Stockbridge in half and another allowing for a referendum to create the new city of Eagle’s Landing – did not violate the state’s constitution.

The city can immediately appeal to the Georgia Supreme Court which is where this question would ultimately be decided. The decision, although negative for remaining Stockbridge residents and creditors, was necessary in order to move the issue through the courts. If the move is ultimately judged to be legal, it would be a real negative for all Georgia local credits and would reflect a degree of bad faith by the State which would be taking an action which arguably impairs existing contracts between borrowers and creditors.

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

$10,245,000*

SOUTH CAROLINA JOBS-ECONOMIC DEVELOPMENT AUTHORITY

Solid Waste Disposal Revenue Bonds

(Ridgeland Pellet Company, LLC Project)

As we move through the interest rate cycle, we are not surprised to see yet another high yield issue for a relatively untested technology project financing being foisted on the municipal bond market. In this case, the project is designed to produce wood pellets for use as heating fuel overseas. The fuel for the pellets is wood waste produced at sawmills.

Some projects in this sector have been economically viable but the experience with these sorts of projects in the municipal bond space have been decidedly negative. Whether it be for use as fuel or for conversion into products such as medium density fiberboard, the municipal market is littered with a trail of failed projects of this type. As is often the case, the security for the debt is the project itself. The corporate entity operating the plant was newly established in January of this year so there are no other substantial assets behind the project.

The investors once again are being asked to assume all of the construction and operating and financial risk of the project. It has been my experience that these deals are financed in the municipal market after the traditional taxable financing sources have passed on the opportunity. One always has to wonder why operators who have supposedly executed similar successful projects have taken this financing route. This is especially true when a smaller scale individually owned business shifts its source of financing from its traditional sources to the municipal market.

Whenever it occurs at the later point of an economic cycle when interest rates are trending upward, warning lights should go off. Deals in the municipal high yield space that have these characteristics when refinancing options are limited and the perception of overall economic risk is greater present a situation that should motivate investors to strike as hard a deal as possible to mitigate these concerns. Unfortunately, the supply/demand dynamics of the municipal high yield market often result in a deal more favorable for the project rather than for the investor. Caveat emptor!

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BRIGHTLINE

We continue to watch the rollout of the Brightline high speed rail service in Florida from a number of vantage points. The development of successful service would of course mark an important milestone in the evolution of mass transit in the country. Coming at a time of rapid technological change in the transportation sector, the success of this service on a sustainable basis would put the US in a better position to catch up with much of the industrialized world in terms of its long distance passenger rail service.

What interests us about the Brightline story is its continued insistence that it is a privately financed project even as it continues its intense efforts to obtain tax exempt financing for its construction. Those efforts continue as Brightline seeks to complete its expansion from the east coast of Florida to Orlando. Even as the long term outlook for the sustained financial viability of the project, its sponsors are already moving on to additional frontiers for its ambitions.

Now sponsors are pushing for an expansion of service from Orlando to Tampa and are mentioning the potential for projects in other states such as Texas. What we are to make of this is unclear, as the information on passenger utilization and revenues has yet to show that the existing Miami to Palm Beach service corridor is producing a long term viable framework on which expansion can be supported. Suffice to say that we remain unconvinced as the service remains in the “novelty” phase including a substantial publicity effort and promotional pricing.

ARIZONA

Supporters of The Invest in Education Act announced that they have collected enough signatures to put the question on the ballot in November.  The measure proposes raising the income tax rate from 4.5 percent to 8 percent for people  making at least $250,000 and for families earning at least $500,000. For individuals making $500,000 and joint filers making $1 million, the tax rate would be 9 percent. If passed, the tax is projected to raise $690 million annually for teacher salaries and supplies, as well as restoring full-day kindergarten and reducing class sizes.

In May, Gov. Doug Ducey signed a budget giving teachers a 20 percent pay raise over three years plus more than $300 million in discretionary funds over that period. Ducey’s “20 by 2020 plan” is expected to cost $240 million this fiscal year, increasing to $580 million by 2021. The Governor’s plan is based on a new car registration fee of about $18 per vehicle, which is expected to generate an extra $140 million per year.

The governor has repeatedly said he would not support a tax hike on Arizonans.  A telephone poll conducted three weeks after the teacher strike ended found that 65 percent of voters said they would support the initiative in November.

MEDICAID

The ACA has been given up for dead many times but there continues to be momentum for expansion of Medicaid. The latest example is in conservative Nebraska where an activist group seeking Medicaid expansion in Nebraska, announced  that it had gathered more than 133,000 signatures in support of a ballot initiative to authorize the expansion.  85,000 valid signatures are required to put the proposal on the ballot.

The initiative would extend Medicaid coverage to some 90,000 Nebraska residents, who currently do not qualify for the program but have difficulty purchasing health care on their own through the Affordable Care Act. The state will join Idaho and Utah with a Medicaid expansion initiative on its ballot. The initiative is an effort to get around the steadfast opposition to expansion expressed by the state’s governor.

Mississippi has revamped its request to impose work requirements on its Medicaid beneficiaries, a move to address federal concerns that its original proposal would have left some without insurance. In the overhauled proposal, Mississippi guarantees beneficiaries will receive up to 24 months of coverage if they comply with the proposed work requirements, which include working at least 20 hours per week, volunteering or participating in an alcohol or other drug abuse treatment program. Mississippi submitted its initial request late last year.

CALIFORNIA

California received more tax revenue than expected during the month of June and for the 2017-18 fiscal year, which ended June 30. Total revenues of $19.91 billion for June were greater than anticipated in the budget signed in June 2017 by $2.30 billion or 13.1 percent. All of the “big three” revenue sources came in higher than projected. Overall revenues for FY 2017-18 of $135.29 billion were $1.53 billion more than estimates in the May budget revision and $6.82 billion higher than expected in the 2017-18 Budget Act. Total fiscal year revenues were $13.38 billion higher than in FY 2016-17.

For June, personal income tax (PIT) receipts of $12.57 billion were $691.8 million, or 5.8 percent, higher than estimated in the budget proposal released in May. For the fiscal year, PIT receipts of $93.48 billion were $4.34 billion, or 4.9 percent, more than projected in the 2017-18 Budget Act. June corporation taxes of $3.23 billion were $577.2 million, or 21.7 percent, above assumptions in the governor’s May budget proposal. For the fiscal year, total corporation tax receipts were 14.8 percent above assumptions in the enacted budget. Sales tax receipts of $3.15 billion for June were $759.0 million, or 31.8 percent, more than anticipated in the governor’s FY 2018-19 amended budget proposal. For the fiscal year, sales tax receipts were 2.0 percent higher than expectations in the 2017-18 Budget Act.

At the conclusion of FY 2017-18, the state’s General Fund had $10.38 billion more in receipts than disbursements, and $4.84 billion were used to repay outstanding loans from the previous fiscal year. At the end of June, there were $39.93 billion available for internal borrowing from the state’s own funds, which was more than anticipated in the May budget proposal by $1.81 billion.

PUERTO RICO

The government of Puerto Rico sued Puerto Rico’s Financial Oversight and Management Board for attempting to “usurp” the island government’s powers and right to home-rule. The suit is the government’s response to the fiscal board’s rejection of an $8.7 billion budget passed by the legislature, contending it was not compliant with the commonwealth fiscal plan the panel certified. The board proceeded to impose its own budget, which cuts funds for municipalities and workers’ year-end pay, known as the Christmas bonus.

The suit outlines the Government’s position. “The Oversight Board cannot compel the Governor to comply with its policy recommendations, whether those recommendations are free-standing or advanced in a fiscal plan. And the Board certainly cannot force those recommendations on the Commonwealth via a budget. Specifically, the Oversight Board cannot do what it is attempting to do: impose mandatory workforce reductions, change the roles and responsibilities of certain government officials, criminalize certain acts under Puerto Rico law and otherwise seek to micromanage Puerto Rico’s government.”

The suit seeks a ruling declaring that the “substantive policy mandates” in the board’s budget exceed the oversight panel’s “powers and are null and void,” as well as a ruling “enjoining the Oversight Board from implementing and enforcing the Oversight Board’s rejected policy recommendations.” As is nearly always the case, Puerto Rico seeks special treatment. For example, the District of Columbia Financial Responsibility and Management Assistance Act of 1995, which granted the District of Columbia’s Financial Control Board the power to nullify legislative acts and “compel the mayor and city council to adopt its policy recommendations”.

The suit accuses the PROMESA board of attempting to micromanage Puerto Rico’s fiscal affairs. In our view, micromanagement is what Puerto Rico needs. We have asked in a variety of forums why Puerto Rico’s American citizens should be exempt from such supervision when numerous mainland jurisdictions have operated under it. It is a question which never receives an answer. This makes it hard to support the Puerto Rico government’s position as it seeks to regain market access and has multi-billions of defaulted debt outstanding.

FITCH RATINGS ON HOSPITALS

A request from the Lexington County Health Services District, Inc., SC (the district) on behalf of Lexington Medical Center (LMC) to Fitch to withdraw its non-investment grade rating has served to highlight changes to Fitch’s rating criteria for hospital credits. Under the revised criteria, Fitch includes operating leases and net pension liabilities as debt equivalents when assessing a hospital’s leverage profile.

The District’s debt had been rated A+ by Fitch as recently as November, 2017. The application of the new criteria resulted in a new rating of BB+. LMC’s management did not participate in the rating process for this review. The below investment grade rating was applied despite “strong medical and surgical volume growth as a result of successful expansion strategies with a highly integrated physician platform and ambulatory network and further bolstered by population growth in the county.” Fitch also notes that the district returned to strong double digit operating EBITDA margins on an unaudited basis in 2017 and currently in unaudited 2018.

Fitch applied a 20 year period to achieve full pension funding. This is shorter than the 30 year period used by many municipal issuers. Complicating the hospitals position is its status as a governmental entity which participates in state managed pension plans. The District is therefore limited in its ability to alter its pension position outside of actions to spend more currently on pension contributions.

As a result of all of this, the District has asked for the rating to be withdrawn. We see the basis for Fitch’s actions and do not argue that the A+ rating was no longer warranted under the terms of Fitch’s methodology. Whether or not, an enterprise which is projected to produce operating EBITDA margins of approximately 5% to 5.5% in the coming years net of pension contributions is deserving of a speculative grade rating is another issue.

We are not surprised at the request to withdraw the rating. We do not see this sort of pension funding assumption applied to many other credit sectors, so it is understandable that this issuer would exercise such a request. A six notch downgrade does seem to be excessive.

TRUCKERS SUE AGAINST TOLLS IN RHODE ISLAND

In June of this year, the State of Rhode Island began charging tolls on trucks using the major highway in the State. Under the plan, which was signed into law back in 2016, 18-wheelers will pay up to $20 to cross the state traveling on Interstate 95. A single truck will be capped at paying $40 a day.

The tolls are intended to finance a 10-year plan to repair deteriorating bridges in the Ocean State; Rhode Island has the highest percentage of structurally deficient bridges in the country. The tolls, to be collected electronically via 14 gantries, are expected to bring in around $45 million a year once they are up and running.

The scheme seeks to impose costs on those vehicles which contribute to the most wear and tear on roads as well as to address congestion issues. The American Trucking Association and three companies  said the toll system launched last month discriminates against out-of-state trucking companies, violating the commerce clause of the  U.S. Constitution.

It asks a judge to stop the tolls, now operating at two locations on Route 95 in Washington County, and eventually slated to include 14 tolls throughout the state. The two Route 95 tolls charge $3.25 and $3.50 respectively, so 133,000 transactions would result in somewhere in the neighborhood of $450,000 in charges since the system has been running.

The toll program is but one step in efforts at the state level to develop usage based schemes for road users in the face of inaction at the federal level to finance infrastructure. It would seem to be the type of effort supported by the Trump Administration as it seeks to move the finance of infrastructure to a fee based model and to increase the role of the private sector in infrastructure development and execution.

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

________________________________________________________________

SANTEE COOPER SEEKS DIRECT REVIEW

South Carolina Public Service Authority (Santee Cooper) has requested a direct review by the South Carolina Supreme Court of a lawsuit filed by 20 electric co-ops representing almost 2 million customers to prevent Santee Cooper from charging them for the costs of the failed nuclear generating expansion. The co-ops want the courts to order Santee Cooper to stop charging them for the unfinished reactors, which Santee Cooper and its partner, SCANA, abandoned last summer after a decade of work and $9 billion in costs. The co-ops filed suit in August to stop the billing and seek refunds.

Santee Cooper argues that the utility has the legal right to charge its customers for debts it incurred to build the reactors even after the project was cancelled, leaving billions in unpaid debt. The chairman of the board of Central Electric Power Cooperative, which buys power for the state’s coops from Santee Cooper, said, “Let’s be clear: electric cooperative consumer-members should not have to pay billions of dollars for two nuclear units that are not producing power.”

Central Electric, Santee Cooper’s largest customer, buys about 60 percent of the power that utility produces and distributes it to the state’s electric co-ops. The co-ops want a “swift resolution to this matter for our members that protects them from footing the bill for someone else’s mistakes.” Central Electric is Santee Cooper’s largest customer. It buys about 60 percent of the power that utility produces. If the co-ops should prevail, Santee Cooper “eventually would be unable to maintain its ongoing operations,”   according to its filing for review.

The Court could take the matter up, hold hearings and, ultimately, issue a ruling on Santee Cooper’s petition. Or the high court could send the issue back to a lower court for hearings, producing a record of the facts and the laws at issue.

HEAD TAX UP FOR VOTE IN NOVEMBER

The Mountain View, CA City Council voted unanimously late Tuesday to place a measure on the November ballot asking residents to authorize taxing businesses between $9 and $149 per employee, depending on their size. If the measure passes, the tax could generate upwards of $6 million a year for the city, with $3.3 million coming from Google alone. The bulk of money raised through the head tax would pay for transit projects, including bicycle and pedestrian enhancements, and 10 percent would go toward providing affordable housing and homeless services.

The effort comes in the wake of the City of Seattle’s recent effort to enact such a tax only to repeal it before it was collected in the face of heavy political pressure lead by Amazon. While the tax in Mountain View would be imposed on a variety of employers, the real target is Google. Unlike Seattle’s proposal, which was primarily meant to ease homelessness, this one would benefit not only his city’s residents but also Google’s employees, who face the same transportation and housing challenges.

Efforts of the City’s business community seem to reflect a belief that the ballot measure would succeed. The city’s Chamber of Commerce, opposed the decision, but says it now hopes to persuade a majority of council members to lower the proposed maximum tax rates before settling on the ballot’s language. The Chamber has originally proposed an alternate tax model that asks businesses with more than 1,000 workers to pay a flat $100 per employee rate.

The model the council ultimately approved would charge the city’s roughly 3,700 businesses a progressive flat rate based on their size and a progressive per employee rate. Businesses with up to 50 employees would be charged a base rate of up to $75 per year and those with more would be charged a base rate plus a per-employee fee that climbs with the work force’s size, up to a maximum of $150 each at Google, which employs a little more than 23,000.

Mountain View’s current business tax has been in place since 1954 and is based on businesses’ square footage. Head taxes are in place in other Silicon Valley communities including San Jose, Sunnyvale and Redwood City.  Cupertino is expected to propose one in 2019. The tax, to be phased in over two years starting in 2020, requires the approval of a simple majority of voters.

GREEN MOUNTAIN BUDGET BATTLE

Vermont Gov. Phil Scott announced that he will allow the legislature’s latest budget plan to become law, a decision that will prevent a July 1 government shutdown. “I’m left with no choice but to allow [the budget] to become law without my signature,” Scott said.

The budget is essentially the same as the one Scott vetoed June 14. The House passed the proposal after allegations of a procedural error. The votes came after a compromise deal that would have ended the impasse fell apart Friday.  The governor has insisted since he took office in 2017 that the state budget should not increase taxes or fees for Vermonters.

The Legislature passed three versions of the state budget which would not prevent an increase in the nonresidential property tax rate, which is is set annually under state law. Scott vetoed the first two but will not veto the latest proposal.

The lawmakers’ goal was to fund shortfalls in the state’s teacher retirement fund. The Governor hoped to do that while preventing a tax increase on nonresidential property tax payers, which includes renters, small business owners, and camp owners. The impasse was all the more frustrating as an adopted budget does not have to be balanced – Vermont remains the only state where that is the case. It would however, have forced the government to shut down if a budget had not been enacted.

KENTUCKY MEDICAID WORK RULES ENJOINED BY FEDERAL COURT

The U.S. District Court for the District of Columbia vacated the Trump administration’s approval of Kentucky’s plan and sent it back to HHS. The Court said that the Trump administration’s approval was “arbitrary and capricious” because HHS did not address how the Kentucky waiver would further the underlying purpose of Medicaid. “The record shows that 95,000 people would lose Medicaid coverage, and yet the [HHS] Secretary paid no attention to that deprivation.”

Gov. Matt Bevin has threatened to cancel the entire Medicaid expansion, which covers more than 400,000 low-income adults in his state, if courts blocked the work requirement or other changes he sought. Kentucky had the biggest improvement in its rate of uninsured residents of any state which expanded Medicaid under the ACA.

The decision continues a streak of losses for the fiscally conservative Governor. Teacher protests earlier in the year led to changes in education funding which he opposed and pension changes championed by the Governor and approved by the Legislature were recently found to be legally deficient in the courts. Now, the plan to restrict Medicaid has failed judicial review.

Effectively, the current credit outlook for Kentucky remains guarded at best as pension continue to weigh on the Commonwealth’s credit and hold down its ratings.

NEW JERSEY AVERTS A BUDGET SHUTDOWN

Gov. Philip Murphy of New Jersey and Democratic legislative leaders reached an agreement on a fiscal 2019 budget to keep the government open and avoid a state shutdown for the second time in two years. The budget agreement increases the income tax to 10.75 %from 8.97 % on those making more than $5 million a year.

The budget includes an annual surcharge of 2 % on companies that earn over $1 million annually that will be in place for four years. Mr. Murphy’s plan to raise the sales tax to 7 % from 6.625 % was not included in the final deal. That outcome reflects the compromises which had to be made by both sides. The Governor gave up a sales tax increase and the legislature allowed the income tax to be raised.

The $37.4 billion budget includes financing for nearly all of the Governor’s proposed investments, including a $242 million increase in funding for New Jersey Transit, an additional $83 million for prekindergarten, an extra $25 million for community colleges and a $3.2 billion payment into the state’s underfunded pension system.

The pension payment is a positive reversing a trend of annual underfunding even after an agreement was reached in the Christie Administration to increase annual payments by the State. The state prevailed in litigation brought by the state’s employees after the Legislature failed to meet the annual appropriation levels agreed to.  New Jersey is an outlier this year as the last state in the country that hadn’t reached some sort of a budget agreement by the fiscal deadline, according to the National Conference of State Legislatures.

PROPERTY VALUES IN CHICAGOLAND

The problems of the City of Chicago in terms of its finances are pretty well known. It is through the prism of these problems that other economic and demographic trends are viewed. For the first time in some years, there may some positive trends emerging in terms of the regional tax base which supports outstanding tax backed debt from issuers in the region.

The full market value of real estate in Cook County was approximately $559.7 billion in tax assessment year 2016 according to an annual estimate released by the Civic Federation. The 2016 total value estimate represents an increase of $30.8 billion, or 5.8%, from the 2015 estimated full value. Tax year 2016 is the most recent year for which data are available. The 2016 estimates represent the fourth year that real estate values in Cook County increased following six straight years of decline in value.

In addition to Cook County as a whole, the report estimates the full market value of real estate in the City of Chicago, northwest Cook County suburbs and southwest Cook County suburbs. The estimated full market value of real estate in the City of Chicago increased by 5.4% in tax assessment year 2016 while the northwest and southwest suburbs experienced increases of 6.4% and 6.0%, respectively.

While the estimated full value of real estate has increased since 2012, the 2016 full value of real estate was still $96.8 billion lower than it was ten years prior in 2007. Between 2007 and 2016 the estimated full value of all classes of property in Cook County as a whole declined by 14.7%. As shown in the chart below, estimated full value decreased from $656.5 billion in 2007 to a low of $414.4 billion in 2012, a decline of 36.9%, then rose to $559.7 billion in 2016.

So in spite of declines in population, the value of property continues to increase. That is the result of a lot of things (the strength of the real estate market is apparent in many regions) but we suspect that the willingness and ability of new residents to afford the higher real estate values is offsetting to some extent the declines in population that may be driven by gentrification and the move out of Chicago by lower income residents in response to higher living costs and a skills gap that keeps those residents from the better paying jobs.

ENJOY YOUR FOURTH OF JULY

Like many of you, the MCN is taking some time off this week as we celebrate the nation’s birth. It will return on July 16. Enjoy the Fourth safely!!

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

________________________________________________________________

ISSUE OF THE WEEK

CITY OF LOS ANGELES

$312,000,000

General Obligation Bonds

$1,500,000,000

Tax and Revenue Anticipation Notes

The GO bonds are secured by the city’s dedicated, voter-approved unlimited property tax pledge. The ad valorem property taxes levied and collected for the bonds is restricted for use to pay the GO bond debt service. The notes are secured by a pledge of unrestricted fiscal 2019 receipts.

The City comes to market with its double A ratings intact and with a stable outlook. The TAN /RAN issue is a normal seasonal borrowing to address timing mismatches between the receipt of revenues and expenditure requirements.  Proceeds of the TAN/RAN issue will be applied to pre-fund the City’s fiscal 2019 pension contributions at the beginning of the fiscal year with 75% of the proceeds. The remaining proceeds will address cash flow imbalances.

The bonds will be used to address various aspects of the City’s homelessness problem. Proceeds will finance projects for providing safe, clean affordable housing for the homeless and for those in danger of becoming homeless, such as battered women and their children, veterans, senior, foster youth, and the disabled; and provide facilities to increase access to mental health care, drug and alcohol treatment, and other services.

The bond rating reflects the city’s strengthening financial position. This stems from steady gains in operating fund balances and cash reserves. Net direct debt is low. As is true for most California cities, the city’s elevated unfunded pension liability will continue to pressure the city’s finances. Continued improvement in the regional economy is contributing to steady growth in ongoing revenues.

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STADIUM GAMES MOVE TO THE MINOR LEAGUES

The Rhode Island legislature voted to forfeit up to $38 million in city and state taxes on a new stadium and its surrounding area for the Triple A Pawtucket Red Sox. Under the legislation, the Paws ox would contribute $45 million to the $83 million project. It would also be responsible for any cost overruns.

The state and city would be responsible for the remaining $38 million in bonds issued by the Pawtucket Redevelopment Agency. The municipalities’ costs for the project would be financed through tax increment revenue bonds. Only tax revenue generated directly by the stadium and its surrounding area would go toward paying off the bonds.

Having learned hard lessons through the infamous Studio 38 revenue bond financing which saw the state called on for its “moral obligation”. In this case, the state will not be guaranteeing the debt in any way. The new plan culminates a nearly two year long negotiation process.

The legislature may have been spurred into action by efforts by the city of Worcester, MA to entice the Paw Sox to move. McCoy Stadium–the current home of the Paw Sox- is the oldest active Class AAA facility in Minor League Baseball. The Paw Sox would not be the first team to use the threat of another suitor – real or imagined – to extract a better deal from their existing home. The practice which has been highly refined by major league franchises in every sport is now showing up with regularity at the minor league level.

COFINA LITIGATION

Bank of New York Mellon, the trustee of the Puerto Rico Sales and Use Tax, has requested from the court to permit it to intervene in the negotiations for a settlement in the Commonwealth-Cofina dispute, to oppose certain aspects involving the distribution of the funds. Recently, representatives of the Commonwealth and of Cofina announced a preliminary settlement.

The Commonwealth Agent wants the Bank of New York Mellon, to put in separate accounts all 5.5% of Sales and Use Tax revenues currently in the bank that were received prior to June 30 and all SUT revenues received after July 1, 2018. Once a settlement is reached, Post-July 1, 2018 funds may be allocated and released to the Commonwealth and Cofina in accordance with the percentage shares in the settlement agreement, that is 53.65% for Cofina, which would be the first dollars of the 5.5% Sales and Use Tax, and 46.35% for the Commonwealth.

The Commonwealth-Cofina dispute centers on who is the owner of the sales and use tax, whose revenues are currently used to pay for government operations and to back Cofina bonds. A resolution to the dispute is needed as part of the Title III bankruptcy proceeding so the judge can determine how to distribute assets. The Commonwealth representative in the dispute, which is the Official Committee of Unsecured Creditors, asked the court to issue an order establishing certain procedures to dispose of the Sales and Use Tax funds.

BNY Mellon would like the Court to approve an agreement between the Agents now that, in such circumstances, the Court’s hypothetical future ruling would be retroactive to July 1, 2018. In effect, the deposit of Pledged Sales Tax with BNYM after July 1, 2018, could cease to be governed by the Resolution and applicable law.

KENTUCKY PENSION REFORM UNCONSTITUTIONAL

A Circuit Court judge struck down Kentucky’s pension reform law, saying the rapid manner in which it was passed was unconstitutional. According to the judge, the six hour process from insertion of the language dealing with pensions into an unrelated sewer bill on March 29, violated safeguards to ensure “legislators and the public” can know the content of bills under consideration.

In an unusual twist, the Commonwealth’s Attorney General argued that the law illegally cuts pension benefits and that the expedited process violated the state Constitution. The Court’s order accepted the Attorney General’s argument that the bill did not get three readings in each chamber as required by the Kentucky Constitution. The normal process requires at least five days to pass a bill for it to get three readings in each chamber. In this case, SB 151 got its first five readings when it was still a sewer bill.

It also said that the legislation appropriated state funds and — as an appropriations bill — required a majority of all 100 House members and 38 senators to pass. Legislative leaders have contended the bill does not appropriate state funds, and as such required only a majority of members who voted to have voted for it — so long as at least two-fifths of each chamber’s members voted yes.

The order did not decide whether the new law’s modest changes in benefits violate contractual rights of public employees or retirees. The Governor’s office argued that the General Assembly has frequently used the speedy process and that many important state laws will surely be challenged if the court struck down the pension law on this basis. The Court took the position that other laws were not at issue in this case and that in this case the legislature had clearly used a rapid process that clearly violated the Kentucky Constitution’s mandate that the process be deliberate enough so that the public can follow the bill and react.

The law in question changes how current teachers can use accumulated sick days to determine their pension benefits. And it requires state and local government employees who started between 2003 and 2008 to begin paying 1 percent of their pay for retiree health benefits. changes how current teachers can use accumulated sick days to determine their pension benefits. And it requires state and local government employees who started between 2003 and 2008 to begin paying 1 percent of their pay for retiree health benefits.

The bill requires that new teachers starting next year be placed in a new kind of pension plan — a “hybrid cash balance” plan rather than the current traditional pension.

FLORIDA COMPLETES AAA HAT TRICK

Moody’s has upgraded the State of Florida’s general obligation bonds to Aaa. The State now has triple A ratings from the three major rating services. Moody’s cited a sustained trend of improvement in Florida’s economy and finances, low state debt and pension ratios, and reduced near-term liability risks via the state-run insurance companies. It notes that State finances are characterized by healthy reserves and historically strong governance practices and policies that are expected to continue. The state has also maintained consistently low debt and pension liabilities that compare well with other Aaa rated states.

The rating also takes into account the State’s potential risks from climate change. It references the fact that Florida’s exposure to storm-related costs and other climate risks is high. Some of the exposure – hurricane risk primarily – is addressed through the state’s insurance program. Other issues related to risks from flooding as well as encroaching seawater are not addressed so easily. There are potentially significant capital costs associated mitigation of these risks as well as the need to develop resiliency.

MICHIGAN SEEKS MEDICAID WORK REQUIREMENT APPROVAL

Michigan has enacted legislation which would add work requirements for those enrolled under expansion under the ACA, about 670,000 people. There are exemptions including for people who are disabled, pregnant, children or elderly. Those who do meet the requirements will have to work for 80 hours per month, or be in school, job training or substance abuse treatment.

There are exemptions including for people who are disabled, pregnant, children or elderly. Those who do meet the requirements will have to work for 80 hours per month, or be in school, job training or substance abuse treatment.

The legislation became a source of controversy over its inclusion of provisions which would have exempted people in counties with high unemployment rates from the work requirements. Critics argued the effect of that would have been to exempt many white people in rural areas while imposing work requirements on minorities in urban areas. This led to the provision being dropped in order to get legislative approval.

If the plan is approved by the Trump administration, Michigan would become the fifth state to add work mandates to its program.

TARIFFS AND EMPLOYMENT

The impact of the recently announced tariffs by the US and the response from the EU has begun to manifest itself in terms of domestic employment. There are few products more American than a Harley Davidson motorcycle. In recent years, an increasing number of these vehicles have been sold overseas with a steadily increasing level of sales occurring in  the EU. The company reported $5.65 billion in revenues last year and Europe is its largest overseas market, with almost 40,000 customers buying motorcycles there in 2017. This means that trade war between the US and its trading partners is of increased concern to exporters such as Harley who have begun to quantify the effect of tariffs on their overseas competitiveness. That exercise is beginning to drive production decisions which will have negative impacts on US manufacturing employment.

Harley has announced that European tariffs have jumped from 6 percent to 31 percent. That increase will add on average $2,200 to the cost of each motorcycle sold in the EU, and would cost the company $90 million to $100 million a year. So, “increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe.”

Harley has already lowered production at its Kansas City manufacturing facility. Over the next nine to eighteen months, Harley will be reviewing its production and employment levels at its York, PA and Menominee Falls, WI. The decision comes as Wisconsin is implementing its program of construction and tax subsidies to support minimum wage employment at the Foxconn plant under development in southern Wisconsin. we could see the somewhat incongruous phenomenon of the State of Wisconsin paying for lower wage jobs while concurrently watching as the trade war costs the State existing good paying manufacturing jobs.

We see this move as the beginning of a process for manufacturing concerns rather than a one off. The auto industry will face many of the same issues as will other manufacturers. In many communities, these jobs are among the best available especially for the worker cohort that includes non-college graduates. Shifts of those jobs overseas will be directly impactful on the credits of the municipalities where significant manufacturing facilities remain.

 

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

________________________________________________________________

ISSUE OF THE WEEK

$1,699,495,000

GOLDEN STATE TOBACCO SECURITIZATION CORPORATION

Tobacco Settlement Asset-Backed Bonds

The Bonds carry a final maturity of 29 years and the 2047 bonds are estimated to have an expected average life of 21.2 years through the turbo redemption feature. Those bonds will not be rated.

The issues which impact tobacco bond credits are well known and understood. The primary risks are that cigarette sales will decline faster than projected and that this will generate lower than expected revenues. This issue will refund a similar amount of bonds issued in 2007. The expectation is that the refinancing would generate a lower debt service structure  and would therefore have a greater margin to absorb unanticipated declines in available revenues.

The consumption forecast accompanying this bond issue estimates that cigarette sales will decline 3.1% annually through the final maturity of the bonds.

We continue to view tobacco bonds as trading vehicles for institutional investors. Individuals have to be prepared for a fair amount of price volatility relative to that experienced by most municipal bonds.

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WAYNE COUNTY, MI MAKES THE GRADE

Moody’s Investors Service has upgraded to Baa2 from Ba1 the issuer rating of Wayne County, MI. The action completes the return of the County’s general obligation credit to investment grade by the major rating agencies. The action is premised on the county’s regained structural balance. The county’s current operational balance could also support tackling deferred maintenance and investments in personnel and handle to debt service costs of bonds issued to complete the County’s new criminal justice center.

 

The upgrade comes as the County still deals with a slow recovery in the labor market and persistently negative net migration. The County tax base has still not recovered to the level it was at before the recession. Even in an environment of growing tax base valuation, the rating is limited by property tax limits in Michigan which impede the County’s ability to raise revenues. The County is comprised of 34 cities, including the City of Detroit, 9 townships, and 33 public school districts. With a population of 1.8 million residents, the county remains one of the twenty largest in the country despite multiple decades of out-migration.

BUDGET BLUES RETURN TO NEW JERSEY

Those who hoped that a change in administration in New Jersey might usher in an era of relative budget peace look to be disappointed as the deadline for enacting a budget comes closer. The governor’s office and the State senate president both offered somber outlooks for the enactment of a budget by month’s end. The comments followed an announcement that talks between the legislature and the Governor had broken down and that separate budgets will be offered by the Governor and the legislature.

The Governor’s plans include a raise in the sales tax back to 7 % and a millionaires tax.  If millions of dollars in funding to “Democratic priorities,” including funding for underfunded school districts is not a part of a budget, there will be no budget by July according to the Senate President. That could lead to the second state government shutdown in as many years.

The Legislature’s alternative combines tax increases on corporations, a tax amnesty program, spending cuts and projected savings in employee health care costs. It includes a 3 percentage point increase in the tax rate paid by corporations with profits over $1 million that would expire after two years. At 12 percent, the tax rate would tie with Iowa for the highest in the U.S.

Neither budget plan deals directly with the impact of changes to the federal tax code which are expected to lead to increased federal taxable income fop NJ residents due to the elimination of the SALT deduction. If the Legislature passes its own budget, the Governor can veto all or part of the plan. To avoid a veto and/or a shutdown, negotiations continue.

ALASKA BUDGET BREAKS NEW TRAIL

The State of Alaska has enacted a budget for the fiscal year beginning July 1. The adopted budget earned the State and improved rating outlook from Standard and Poor’s. This occurred despite the fact that the budget includes funding for operating expenses derived from the use of Permanent Fund monies for those purposes for the first time in the Fund’s history. According to the Legislature and the Governor, the budget and accompanying legislation will reduce Alaska’s annual deficit from almost $2.5 billion to $700 million.

The new budget, for example, deliberately underfunds the state’s Medicaid program. Federal law requires certain payments, and the Legislature failed to approve enough money to fully pay the bills. In other cases, the Legislature paid for ongoing expenses from accounts that don’t recharge quickly. That money won’t be available next year, and the Legislature will be forced to find a new way to pay for those expenses.

This year, lawmakers approved a lower Permanent Fund dividend in order to partially balance the deficit. This year’s dividend of $1,600 per person will cost the state about $1.02 billion. Adding an extra $1,000 to bring the payment up to the level derived by use of the existing formula for the dividend would cost about $630 million

The state must also figure out how to pay a multibillion-dollar deficit in its retirement system and meet the constitutional requirement to re-fill the Constitutional Budget Reserve. That reserve has been tapped to the tune of $15 billion over the years to cover current operating deficits. There is only $700 million left in that reserve.

So looking at all of this might cause one to wonder about the timing of the improvement in the State’s rating outlook. It certainly causes us to wonder.

HOSPITAL CONSOLIDATION YIELDS RATING INCREASE

One year ago, holders of debt issued by Presence Health in Illinois were looking at a negative outlook for the rating on their minimum investment grade holdings. Presence Health is a Chicago based health system that owns and operates acute care hospitals, long-term care and senior living facilities, physician practices, clinics, diagnostic centers, home health, hospice and other healthcare services. Those who were willing to stay the course are now benefiting from ratings upgrades resulting from the merger of Presence Heath with Ascension Health.

Last week, Moody’s announced that it was raising its rating on Presence Health debt from Baa3 to Aa2. Some $1 billion of outstanding debt was affected. Effective March 1, 2018, Presence became a subsidiary of Ascension Health Alliance. On May 23, 2018, Presence’s master trust indenture (MTI) was discharged and the Presence MTI obligation was replaced by an MTI obligation of Ascension. With the substitution, the security for Presence’s bonds has been changed to that of the Ascension master trust indenture obligated group.

Ascension’s is the largest not-for-profit healthcare system in the US with $22 billion in total operating revenues. Ascension’s ratings reflect geographic and operating diversification, consolidation initiatives to drive operating improvement, prominent market positions in individual markets, large investment portfolio and the availability of $1 billion in bank facilities.

DALLAS COUNTY SCHOOLS DEFAULT

Dallas County Schools provides transportation to students at multiple school districts in Dallas County, Texas. DCS is scheduled to close this year, as mandated by voters, but the ruling allows a penny ad valorem tax to be collected for another five to six years.  The revenues are needed to pay off some $100 million of debt. DCS’ debt was primarily caused by the agency’s issuance of bonds that were hurt by DCS’ financial collapse from inside corruption.

An ongoing FBI investigation has resulted in two guilty pleas. Had the plan to pay off the debt not been accepted, creditors could have tried to obtain the DCS bus fleet (some 1500 vehicles). Plan approval allows for the distribution of the fleet to the previously served school districts which will now be responsible for transporting their students.

RHODE ISLAND PENSION REFORM WITHSTANDS CHALLENGE

The Rhode Island Supreme Court upheld a 2015 settlement to end litigation against Rhode Island’s state pension overhaul. The decision is a positive for the state’s credit. Pension funding had been a major drag on the state’s credit ratings for years. The current governor had made pension reform one of her priorities when she was State Treasurer.

The settlement included two one-time stipends payable to all current retirees; an increased cost-of-living adjustment cap for current retirees; and lowering the retirement age, which varies among participants depending on years of service. The settlement helped to stabilize the state’s ratings. A majority of state workers agreed to the plan but two plaintiffs chose to challenge it. The decision brings these sort of challenges to an end.

PROVIDENCE GETS A POSITIVE OUTLOOK

Another Rhode island credit plagued by pension funding issues received positive news this week as Moody’s raised its outlook on the City of Providence’s credit rating to stable from negative. The outlook reflects Providence’s recently improved but narrow financial position, high but manageable fixed costs and stability of the city’s underlying economy.

The change in outlook accompanied maintenance of the City’s Baa1 rating. That rating reflects a stabilized but narrow financial position and improved funding practices of its long-term liabilities. It acknowledges that the City’s unfunded pension liabilities are increasing as well as its OPEB liabilities. It also acknowledges the City’s diverse tax base and position as a regional economic center, significant institutional presence, recent tax base growth, ongoing economic development and the statutory lien on property taxes and other general fund revenues pursuant to Rhode Island statute.

State legislation passed in 2011 that provides a statutory lien on ad valorem taxes and general fund revenues, giving priority to payment of general obligation debt in bankruptcy.

NEW MEXICO DOWNGRADED AGAIN

For the second time in two years, New Mexico has been downgraded by Moody’s. This time the move is from Aa1 to Aa2. The downgrade comes in the midst of a stronger resource based markets and a generally improving economy.

The downgrade is is primarily attributable to the state’s extremely large pension liabilities, including both its direct obligation to the Public Employees’ Retirement System (PERA) and its indirect obligation to the Educational Employees’ Retirement System (EERS). The state provides K-12 school districts with essentially 100% of their operating funding. The need to assist districts in addressing their EERS pension liabilities represents a significant financial pressure for the state. That pressure is compounded by spending challenges associated with a large Medicaid caseload, a revenue structure more concentrated and volatile than most similarly-rated states.

New Mexico’s general obligation bonds are secured by the full faith and credit of the state and specifically secured by and paid from a statewide property tax levy without limit as to rate. The treasurer is required to keep the property tax proceeds separate from all other funds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature. If at any point there is not a sufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment.

In spite of the overall improvement in the national economy and recent improvement in oil and gas pricing, New Mexico’s economy underperforms on a relative basis and its wealth and income indicators lag those of comparable states. Incomes are some 77% of the national average and the poverty rate is among the highest among US states. This heightens the role of pensions and Medicaid needs in the State’s budget outlook and these factors will combine to pressure the State’s fiscal positions going forward.

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