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

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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.

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

The Village of Riverdale is located south of Chicago and like many smaller communities long supported by a manufacturing base it has struggled with economic and financial issues in recent years. These factors have depressed taxable values and incomes with an expected negative impact on the Village’s creditworthiness. The village’s population has declined by about 1% since 2010 and, while assessed value (AV) has increased over the last several years, it is still below its 2011 level. About 30% of the village’s residents live under the poverty level and income levels are well below the county, state, and national levels. Currently, the Village is rated CCC as a general obligation credit.

This has forced the Village to take the securitization route in order to maintain access to the capital markets. The Village is now coming to market with a BB rated credit secured by a first lien on the village’s local share of the statewide income tax. The pledged revenue includes all distributions under Section 2 of the State Revenue Sharing Act from the Local Government Distributive Fund of income tax amounts payable by the state of Illinois to the village.

The pledged revenues are secured by a “true sale” of the revenues to a bankruptcy-remote, statutorily defined issuer, the Riverdale Finance Corporation.  The state will direct all pledged income tax revenues to the trustee for benefit of corporation bondholders and the residual will flow to the village for any lawful purpose. The pledged income tax revenue is collected by the Illinois Department of Revenue, which certifies the amount collected to the state comptroller on a monthly basis. The comptroller must deposit the statutorily-dictated local share of the income tax revenue to the Local Government Distributive Fund (LGDF) no later than 60 days after the comptroller receives that certification.

The statewide income tax rate has changed several times since it was first established in 1969 and three times since 2011.  Historically, the state has offset the impact of rate changes by adjusting the local share percentage of total collections. Income tax receipts are allocated to the village based on its population as a proportion of the state population, meaning relative declines in population at a higher rate than the growth rate in state income tax revenue would lead to declines in the pledged revenue.

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CA REVENUES

State Controller Betty T. Yee reported California brought in less tax revenue than expected during the month of May. Total revenues of $8.25 billion were below monthly estimates in the governor’s FY 2018-19 updated budget proposal by $784.2 million, or 8.7 %. With one month left in the 2017-18 fiscal year that began in July, total revenues of $115.38 billion are $784.2 million less than estimates in the May budget revision, but $4.52 billion higher than expected in the enacted budget. Total fiscal year-to-date revenues are $10.10 billion higher than for the same period in FY 2016-17.

 

For May, personal income tax (PIT) receipts of $4.82 billion were $497.4 million, or 11.5 percent, higher than estimated in the governor’s May budget proposal. For the fiscal year, PIT receipts are $3.28 billion, or 4.2 percent, higher than projected in the 2017-18 Budget Act. May corporation taxes of $570.6 million were $79.2 million, or 12.2 percent, less than forecasted in the governor’s proposed budget unveiled last month. For the fiscal year to date, total corporation tax receipts are 15.9 percent above assumptions in the enacted budget. Sales tax receipts of $2.43 billion for May were $1.11 billion, or 31.4 percent, lower than anticipated in the governor’s FY 2018-19 amended budget proposal. For the fiscal year, sales tax receipts are 1.7 percent lower than expectations in the 2017-18 Budget Act.

Unused borrowable resources through May exceeded amended budget projections by 13.4 percent. Outstanding loans of $5.83 billion were $1.17 billion less than the governor’s May Revision expected the state would need by the end of May. The loans were financed entirely by borrowing from internal state funds.

WASHINGTON STATE SCHOOL FUNDING

The Washington Supreme Court declared the state had fully implemented its new school funding plan, lifted the contempt order and the $100,000-per-day sanctions, and ended their oversight of the case. In the McCleary decision in 2012, the Court had ruled that the state had violated its constitution by  underfunding K-12 schools. The issue has been a point of legislative contention ever since.

In 2017, legislators and the governor finally addressed the need for a plan to fund teacher and other school-worker salaries. That pay had been funded by local school district property-tax levies. The justices said the state needed to cover the full cost. The legislature passed a plan to raise the statewide tax rate in 2018 and phases in limits on future tax revenues collected by school districts through local levies.

This past Fall, the justices ruled that plan didn’t fully provide for schools by the September 2018 deadline established  by the court, and suggested lawmakers further increase education funding. To comply, lawmakers and the governor this spring provided an additional $776 million, and set aside another $105 million for the contempt fines.

In 2017, the Legislature committed to put $7.3 billion more in state funds into schools over the next four years through an increase of 81 cents per $1,000 of assessed value in the state property tax. State funding of education now represents more than 50 percent of the state budget for the first time since 1983.

THE FY 2019 BUDGET SEASON IS KIND TO STATE RATINGS

So far the budget season for fiscal 2019 is generating positive ratings news for some states. This past week, three states received positive changes in their ratings outlooks from Standard and Poor’s as the result of actions taken in association with adoption of budgets for the upcoming FY. S&P revised its outlook on Virginia’s general obligation (GO) rating and various issue credit ratings (ICRs) linked to its creditworthiness to stable from negative. It also affirmed its AAA rating on the state’s GO debt outstanding.

S&P also revised its outlook to stable from negative and affirmed its ‘AA’ rating on the state of Alaska’s GO debt outstanding. Adopted legislation (SB 26) outlines a percent of market value approach to use its Permanent Fund Earnings Reserve Account  (ERA) should allow for sustainable draws from the fund in future budgets.

S&P revised the outlook to stable from negative on its ‘AA’ issuer credit rating (ICR) on the state of Colorado. The revision follows the state’s adoption of pension reform in its 2018 legislative session. The state intends to reduce its unfunded liabilities and reach full funding within 30 years under the new bill, which incorporates automatic adjustments to contributions when needed to reach its goal. The liability remains underfunded by the adoption of a funding plan is a clear positive.

CA WATER UTILITY EARNS AN UPGRADE

Eastern Municipal Water District serves seven cities and unincorporated portions of the county and covers an area of 555 square miles, serving a population of over 816,000. The communities of Murrieta, Temecula, Hemet, Moreno Valley, Menifee and San Jacinto represent the district’s principal cities.  retail domestic accounts provide the majority of revenues. Revenue bonds are secured by the net revenues of the combined water and sewer enterprise. The rate covenant on the subordinate lien requires net revenues paid after O&M and senior lien debt service to be at least 1.15 times debt service. The additional bonds test is 1.15 times debt service on a 12-month look back over an 18-month period on outstanding bonds and proposed bonds. The subordinate lien bonds do not have a debt service reserve fund.

Moody’s Investors Service has upgraded Eastern Municipal Water District, CA’s senior lien water and wastewater revenue bonds to Aa1 from Aa2 and subordinate lien revenue bonds to Aa2 from Aa3. With only $13 million of senior bonds outstanding through 2021, subordinate debt is the District’s working lien. A cost-of-service rate methodology approved by the board in March 2017, encourages conservation as well as ensures a greater recovery of fixed costs from recurring, non volume related charges.

The District obtains nearly half of its water through the Metropolitan Water District of Southern California. This will require the District to shoulder a portion of MWDSC’s obligations in connection with the financing of the Delta Water Conveyance project.

UTILITY SUBSIDIES WHEN TAXES CAN’T BE RAISED

Voters in the City of long Beach, CA approved a change to the City Charter which would allow the city should be able to continue the practice of charging city-run utilities for access to rights of way, and then transferring those fees to the general fund. The practice had been carried out for decades but was recently challenged by two separate lawsuits against the city.

Measure M received some 53% support. The vote was presented as a choice between the subsidies or reduced city services. The vote can be viewed as a window onto the thinking of local residents in tax resistant California. City officials estimated that if Measure M had not passed that the general fund revenue loss —where the fees have been transferred at years’ end—could have amounted to about $18 million annually, meaning parks, road repairs, and other city services funded through the general fund could have faced cutbacks.

State law prohibits local utility providers from charging more than what it costs to provide a service and other laws prohibit municipalities from imposing taxes without voter consent. This vote serves as the required consent.

NEW JERSEY SCHOOL DEBT SUPPORT PROGRAM DOWNGRADED

Bonds issued under the program are secured by a pledge of all legally available funds of the state through replenishment provisions for the New Jersey Fund for the Support of the Free Public Schools, regardless of whether a specific budget appropriation has been made, as long as the state has enacted a budget. However, according to the state, New Jersey must enact a state budget for these guarantee funds to be available in the event a local school district misses a debt service payment. Once a state budget is enacted, money held in trust for the New Jersey Fund for the Support of the Free Public Schools is automatically available to pay debt service.

The New Jersey Fund for the Support of the Free Public Schools Program is authorized by Article VIII, Section 4 of the New Jersey Constitution. New Jersey Statutes 18A:56-19, as amended, require two reserve accounts to be maintained in the fund. The old school bond reserve account has been funded in an amount equal to at least 1.5% of aggregate school district debt issued by counties, municipalities, or school districts before July 1, 2003. The new school bond reserve account will be funded in an amount equal to at least 1% of aggregate school district debt issued on or after that date. In the event that the amounts in either the old school bond reserve account or the new school bond reserve account fall below the amount required to make payments on bonds, the amounts in both accounts are made available to make payments for bonds secured under the reserves. On or before Sept. 15 each year, fund

Trustees determine the aggregate amount of school purpose bonds outstanding and are responsible for maintaining appropriate reserve levels based on the market value of reserve investments. If at that time, the funds on deposit fall below the required levels, the state treasurer is required to appropriate and deposit into the school reserve such amounts as might be necessary to meet fund level requirements from all available state resources. To ensure sufficient liquidity, at least one-third of the obligations in the fund must be due within a year. Fund assets are direct or guaranteed U.S. government obligations and are valued annually. Funds in the trust are not available for interfund borrowing by the state.

Now the program has been downgraded by S&P to BBB+ from A-. The downgrade reflects the continued pressure on the State’s general obligation 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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ISSUES OF THE WEEK

$580,000,000

Port of Seattle, Washington

Intermediate Lien Revenue Bonds

Moody’s: A1

The Port issues debt secured by revenues from its overall Port operations. In reality, this is an airport credit as 80% of consolidated operating revenue and 90% of the debt outstanding is connected to the airport.

The port operates Seattle-Tacoma International Airport (SEA). In addition to the airport, the port owns and operates maritime facilities and industrial and commercial properties. The port also owns container terminals and has licensed these terminals and certain industrial properties to the Seaport Alliance. The formation of the Northwest Seaport Alliance (“NWSA”) – the port’s joint venture with Port of Tacoma – serves as a stabilizing element of the port’s credit profile by sharing in operating risk, profit and capital spending for marine cargo operations in the overall Puget Sound region.

The airport is implementing a large $3 billion capital program over the next five years. $1.9 billion of new debt will be issued to fund the project which the construction of four major projects at active/operating terminals. The Port’s debt is secured by a rate covenant that provides for 1.10 times (as first adjusted) or 1.25 times (as second adjusted) coverage of annual debt service. The intermediate lien bonds are further secured by a cash funded common debt service reserve fund.

$1,100,000,000

Southeast Alabama Gas District

Gas Supply Revenue Bonds

Fitch: A

The District (SGS) was created by 14 Alabama communities to acquire, manage, and finance supplies of natural gas on behalf of certain public gas systems. It accomplishes this by entering into pre-paid gas supply contracts in order to lock in favorable prices for its individual system participants. Debt is secured by a pledge of the net revenues of the District. The risk of individual payment shortfalls is mitigated by an agreement with Morgan Stanley to purchase receivables under a guaranty from MS.

If the SGS provides notice to MSCG to remarket gas to other purchasers that it does not need, or does not accept delivered gas, MSCG is required to remarket such gas. If the gas cannot be remarketed, MSCG is required to purchase the gas for its own account. SGS anticipates approximately 25 public gas systems will participate in the SGS Project No. 2 transaction. The receivables purchase agreement with Morgan Stanley is intended to offset the risk of individual participant nonperformance.

SGS anticipates approximately 25 public gas systems will participate in the SGS Project No. 2 transaction. As a result, the rating for the deal reflects the credit rating of Morgan Stanley.

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VIRGINIA MEDICAID EXPANSION

The expansion of Medicaid under the provisions of the affordable Care Act (ACA) has been a priority of Virginia democrats which could not overcome opposition from the other side of aisle for the entirety of the McAuliffe administration. The election of a Democratic governor and the near capture of the Virginia House last November has changed the political calculus. This resulted in last week’s votes to expand Medicaid to cover an additional 400,000 Commonwealth residents.

The measure includes a requirement that many adult recipients who don’t have a disability either work or volunteer as a condition of receiving Medicaid. That was the price established to get a legislative majority. The federal government shares the overall cost of Medicaid with the states; the program covers about 75 million Americans, or 1 in 5.

The state currently has one of the most restrictive Medicaid programs in the country, covering mostly children and disabled adults. Childless adults are not eligible, and working parents earnings are limited to no more than 30 percent of the federal poverty level, or $5,727 a year. The Affordable Care Act allows states to expand Medicaid to adults earning up to 138 percent of the poverty level, which comes out to $16,643 for an individual.

To finance the Commonwealth’s share of the cost, it will tax hospitals to generate revenue for the state’s 10 percent share of the roughly $2 billion annual cost.

PUERTO RICO AID APPROVALS PLAY CATCH UP

The Federal Emergency Management Agency (FEMA) has awarded nearly $219 million in additional public assistance grants to government organizations and private non-profit organizations for Hurricane María recovery in Puerto Rico. As of May 30, FEMA says its Public Assistance program has “obligated $2.2 billion in total funding” to the government of Puerto Rico and municipalities for debris removal and “emergency protective measures,” which are “actions taken to eliminate or lessen immediate threats either to lives, public health or safety, or significant additional damage to public or private property in a cost-effective manner.”

The U.S. Department of Transportation’s Federal Transit Administration (FTA) announced the allocation of $277.5 million in emergency relief funding for public transportation systems damaged by hurricanes Harvey, Irma and Maria. About $232.3 million will be “dedicated to response, recovery, and rebuilding projects, with $44.2 million going toward resiliency projects.” Of the total, $220 million or just under 80% of the funds will go to Puerto Rico.

The announcements accompanied the beginning of the 2019 hurricane season. Concerns continue about Puerto Rico’s readiness in the event of another significant storm this year. The Puerto Rico Aqueduct and Sewer Authority delivered a mixed message when it said that it has the generators needed to support the island’s sewage system; however, it said, 550 generators, or nearly 50%, are still needed to keep the potable water system running in case of a prolonged blackout.

ON LINE TAX DECISION WILL SPUR CHANGES

It is not clear that the Supreme Court will rule in favor of the State of South Dakota in the Wayfair case, a suit that will determine policies to tax online merchandise sales by states and localities. It is also not clear as to the terms and requirements which tax collection entities will have to contend with in order to collect those taxes.

This was the subject of discussion at the Annual Meeting of the National Federation of Municipal Analysts last week. According to the National Council of State Legislatures, on line sales comprise 11% of overall sales and have been increasing at a rate of 15% annually. If South Dakota loses, states will be forced  to adopt individual legislation to deal with the “physical presence” rule. States have three broad ways to deal with the issue.

They could alter “nexus creation” requirements to establish what constitutes a “presence” in a state for taxing purposes. They could require “referral marketplaces” (like Airbnb) to collect and remit sales taxes for sales facilitated through those marketplaces. A third alternative is to establish reporting requirements for those marketplaces enabling states to follow up and collect sales taxes. Minnesota, Colorado,  and Washington have enacted such provisions.

NEW YORK’S EVER INCREASING CAPITAL NEEDS

The budget season for New York State and City has been a relatively tame process compared to other years. The lack of significant concern about the next fiscal year’s budget has allowed for concerns about capital needs to take second place in the debate over the long term fiscal outlook for both entities. Nonetheless, there is an emerging concern about the capital needs of two entities – the Metropolitan Transportation Authority and the New York City Housing Authority.

The needs of both are being highlighted by proposed plans to address the ongoing maintenance and capital facilities renewal needs of both of these entities. The MTA has garnered the most attention with the recent proposal by the newly appointed head of the Authority for a renewal plan to address capital related operating issues which have  generated much angst among the NYC subway system’s millions of riders. The plan has been assigned a price tag of some $19 billion and has revived debate about the funding responsibilities of the state, city, and federal governments in terms of the upkeep of existing facilities.

The issue of the capital needs of the Housing Authority has arisen in conjunction with the establishment of federal oversight of the Authority’s operations, especially as they pertain to funding and execution of its facilities maintenance. The New York City Housing Authority is chartered by the state, funded by rents and federal subsidies, but operated by the city. The many shortcomings of the Authority’s management of those two areas as well as instances of false reporting which raised concerns about the Authority’s ability to continue to receive federal funds. The Authority has estimated that its projects, which house 180,000 New Yorkers, need a capital investment of $20 billion.

In both cases, the state and the city will have to find resources in addition to those funds already being committed to the process. The exact proportion of responsibility is the heart of the issue. Both situations are accompanied by a sense of urgency and visibility and the solution to both problems is not eased by delay in addressing the issue. NYCHA will likely be forced to increase spending under a pending consent decree arrangement with the federal government.

So if the estimates are right, two major entities face a nearly $40 billion need for capital funding at a time of decreased federal support for both. Looking at the long-term fiscal outlook for the federal government, a substantial increase in federal funding is not necessarily viable. So diffusing this debt bomb will be a delicate task for the state and city.

VIRGIN ISLANDS OFFER FY 2019 BUDGET

The U.S. Virgin Islands Gov. Kenneth Mapp presented his proposed fiscal year 2019 budget to the VI legislature. The territory’s pension system gets special attention. In his budget the governor proposed increasing the employer contribution to the system by three percentage points each year in the coming three fiscal years. It is currently at 20.5% of payroll. Mapp said without action the pension system would be insolvent by fiscal year 2024.

Mapp proposes having the Virgin Islands Housing Finance Authority and Community Development Block Grant-Disaster Recovery be used to purchase nonperforming assets that the pension system currently owns. This meant to increase liquidity in the pension funds. A third leg of the plan would require higher paid government employees to make even larger pension fund contributions.

Even after all of this, the plan would shift the insolvency date back by one year to fiscal 2025. As for the rest of the budget, austerity is not a theme. Salaries would be raised 3% and the Governor hopes to lower water rates. Combined with the ongoing recovery efforts, it is not really clear how realistic this budget proposal is.

HIGH SPEED RAIL

The consortium which owns and operates Florida’s Brightline high speed rail project will continue to refer to itself as a private enterprise. That notion however, is weakened with the news that it has received an extension of its deadline to issue tax exempt private activity bonds to finance the second segment of its proposed project. The decision by the US DOT reflects a significant effort by project proponents to overcome a split Florida Congressional delegation.

It has been a contention here that the project is actually very dependent upon tax exempt financing to finish the project. No matter how the bonds are structured and placed, the subsidy provided to the project undermines the argument that this is a project can stand on its own merits as a privately financed endeavor. The fact that Brightline has been so persistent about its pursuit of tax exempt financing and the view that its inability to attract sufficient private capital has driven that persistence drives our skepticism about project viability.

U.S. Rep. Brian Mast, R-Palm City said “The fact that Brightline needed to request an extension underscores that their business model is questionable at best without taxpayer subsidies.”  The railroad has sought the financing authorization under surface transportation programs initially intended for highway development. This has raised issues with Congressional budget hawks regarding the funding authorization.

Brightline officials have said they also are pursuing a $1.75 billion federal Railroad Rehabilitation & Improvement Financing loan. Either funding method would reflect some level of federal subsidy for the 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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RISING DEFAULT RATES SKEWED BY PUERTO RICO

The headline may say that defaults are rising but the fact is that 2017 was an unusual year. S&P recently released the results of its study of defaults in 2017 on debt that it rates. For the third year in a row, the number of defaults in USPF rose, reaching a record 20 in 2017. Puerto Rico accounted for 14 of the defaults. The default rate for USPF was 0.09%, the second highest since 1986. Nonetheless, this rate remains extremely low. The ratings on 903 bonds were raised in 2017, while the ratings on 708 bonds were lowered. States, higher education, health care, charter schools, and housing had more downgrades than upgrades in 2017; this was the second consecutive year of negative rating trends for states, health care, and housing and the seventh straight negative year for charter schools.

The headline data is of course skewed by the fact that Puerto Rico accounted for 14 of the defaults. S&P notes that the rising number of defaults in recent years is not an indication of general credit stress. The ratio of upgrades to downgrades was essentially the same in 2017 as in 2016, at 1.27, but five of eight sectors had a higher number of downgrades than upgrades in 2017. This is an increase from four negative-leaning sectors in 2016 and two in 2015. Where are potential problem areas? Higher education had more downgrades than upgrades in 2017, reversing the positive rating trend of 2016, which resulted from revised criteria. Charter schools also leaned negative, although not to the same degree as in previous years. Health care and housing rating movement was negative for the second consecutive year. Transportation and utilities both had more upgrades than downgrades in each of the past three years.

IRS TO ISSUE SALT DEDUCTION GUIDANCE

The U.S. Department of the Treasury and the Internal Revenue Service issued a notice today stating that proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax purposes. Notice 2018-54  also informs taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

The Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000. In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.

The aim of these proposals is to allow taxpayers to characterize such 2 transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities. Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

The upcoming proposed regulations, to be issued in the near future, will help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

PORT OF OAKLAND STABILIZES REVENUE STREAM

The Port of Oakland has taken the first step in securing long-term revenues from its maritime tenants. It approved the first reading of an ordinance extending marine terminal leases with its largest operator, SSA Terminals The lease extensions, which follow two lease extensions last year, will result in the seaport extending tenant leases that account for close to 70% of maritime revenue through 2030. This would extend visibility for more than 60% of seaport revenue by 10 years, which reduces the contract renewal risk that previously existed for all four of the port’s seaport leases.

The leases renewals provide high levels of minimum or fixed revenue to the port, and their extensions align future cash flow to match the amortization of the port’s debt. the seaport division, which accounts for more than 80% of the port’s total debt and has the most business risk of the port’s three divisions. The Port of Oakland owns the eighth-largest container port in the US and the marine cargo gateway for the Northern California region. the port owns, leases and administers, but does not directly operate, four active container terminals in the San Francisco Bay. As a landlord port authority, the division receives a combination of fixed (referred to as minimum or guaranteed payments) and variable lease payments from tenants. The higher the level of fixed payments the greater stability characterized in the credit.

The port has now reached extension agreements with its two remaining terminals, including its largest terminal, Oakland International Container Terminal (OICT), which accounts for more than 70% of container volume for the maritime division. More than 60% of current marine terminal revenue is now under lease through 2032, while more than 70% is now under lease through 2030. This will enable the Port’s infrastructure development program which a dredging program that provided 50 feet of water to accommodate larger ships and an expanded rail yard, and more recently additional rail track, an on-port cold storage facility and a 185-acre on-port distribution and warehouse complex.

Overall, transactions and the infrastructure program enhance the port’s competitive position and stabilize its ratings.

BONDHOLDER VERSUS PENSIONER RIGHTS

The resolution of the City of Detroit bankruptcy and the ongoing saga of Puerto Rico’s Title III has heightened awareness of and debate over the rights of debt holders versus those of pensioners. Now a recent decision by the Illinois Comptroller has added additional fuel to the debate. Moody’s took a recent opportunity to weigh in with its view of the impact of the move by the Comptroller to deny the City of Harvey’s request for relief from revenue withholding under a state law requiring minimum pension contributions.

Local pension plans in Illinois can request that the state withhold revenue from a sponsoring municipality if that municipality does not make minimum contributions. Harvey’s public safety pension funds have made such requests, and the state has withheld more than $2 million to date. The city asserts that it will soon be unable to meet payroll, and last month announced layoffs. The state comptroller’s office has responded that it has no discretion under state law to consider Harvey’s hardship.

Harvey is the most egregious case of local municipal credit weakness in Illinois. The city missed two debt service payments in fiscal 2016, six in fiscal 2017 and as of February had missed four in fiscal 2018. Harvey historically has underfunded actuarially determined contributions (ADCs) for its public safety pension plans. The city contributed very little to its firefighter pension fund from 2009 to 2013, and even its far higher contribution in 2017 fell far below the ADC. Harvey cannot currently file for bankruptcy under Illinois law and revenue withholding for pensions only heightens the likelihood of more bond defaults and a restructuring.

Moody’s views the decisions negatively not only for Harvey but also for other municipalities in Illinois which might find themselves in the same position.

PR LITIGATION DOINGS

U.S. District Court Judge Laura Taylor Swain, who oversees Puerto Rico debt proceedings, extended to June 29, from May 29, the deadline to file proof of claims against the commonwealth. In another related matter, the Committee of Unsecured Creditors was allowed to intervene and will be able to make discovery in a lawsuit headed by Cooperativa Abraham Rosa and five other credit unions against the commonwealth, the island’s Financial Oversight and Management Board and several other entities, accusing them of “defalcation and fraud” for selling them “unsound Puerto Rican debt” in a “ploy to obtain their assets.”

The Retirement System of the Puerto Rico Electric Power Authority (PREPA) does not want the commonwealth’s Official Committee of Retired Employees to represent its interests. The PREPA Retirement System said “the intervention of the Retiree Committee will create confusion with respect to the different positions that the retirees will have to assume in these Title III court proceedings, as they will be represented by two legal entities that might disagree in any moment about fundamental issues.”

NASSAU COUNTY BUDGET UNDER OTB THREAT

Nassau County has budgeted $15.75 million for fiscal 2018 from revenues from video lottery terminals at Resorts World Casino at Aqueduct Racetrack, which is operated by Genting New York LLC, dedicated to Nassau OTB. So far has received $3 million but only after delay and some dispute.

Nassau had hoped to apply three-quarters of the $20 million the county says is due early next year to this year’s budget, and include the remainder in the 2019 budget. Now there is real concern however, that Nassau OTB will not be able to make its next payment when due. Nassau OTB committed to paying Nassau County $3 million in the 2016 calendar year, $3 million in the state’s 2017 fiscal year — which runs from April 1 through March 31 — and $20 million in each subsequent state fiscal year.

There are exceptions. They include if a similar “full-service” casino opens within a 65-mile radius of Aqueduct, or if gambling revenue for Resorts World drops by 10 percent or more in any one year. The betting agency won’t have enough in profits this year to “permit a payment of $20 million to the county without 1,000 VLTs being operational” at Resorts World. There are only an estimated 500 machines installed. A planned $400 million expansion at Resorts World will accommodate 1,000 Nassau machines as well as a new 400-room hotel, restaurants and other amenities.

The county has been counting on the new revenues to finance an emerging budget deficit. it receives the revenues under an agreement made under a provision in state law enacted after public opposition prevented OTB from building a casino in Nassau. OTB says it expects to pay Nassau $3 million next spring if the number of VLTs still hasn’t reached 1,000. If all the machines come online sooner, the $20 million payment would be prorated, based on the number of months the 1,000 VLTs have been operating.

 

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

THE REGENTS OF THE UNIVERSITY OF CALIFORNIA

LIMITED PROJECT REVENUE BONDS

$739,195,000 Tax Exempt

$94,865,000 Taxable

Moody’s: “Aa3”  S&P: “AA-”  Fitch: “AA-”

GENERAL REVENUE BONDS

$946,580,000 Tax Exempt

$283,415,000 Taxable

Moody’s: “Aa2”  S&P: “AA”  Fitch: “AA”

The General Revenue Bonds are the broadest pledge of the university. The bonds are secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, under recently enacted legislation the Regents can pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects. UC reported $16.2 billion of General Revenues for fiscal 2017. Proceeds from the Series 2018 General Revenue AZ and BA bonds will finance projects across nine campuses. The proceeds will also be used to refund bond, pay-down $450 million of commercial paper and pay issuance costs.

The LPRBs are secured by the gross revenues generated by the projects. The pledged revenues also include any other revenues, receipts, income or miscellaneous funds designated by The Regents for the payment of principal of and interest on the bonds. Certain pledged revenues are dependent upon completion of the projects funded from the proceeds of the 2018 Bonds. There is a 1.1x rate covenant and no debt service reserve fund. In fiscal 2017, pledged revenues provided over 4x maximum annual debt service coverage. Limited Project Revenue bonds will finance housing, dining, and parking projects across seven campuses. The proceeds will also be used to refund bonds, pay-down $140 million of commercial paper and pay issuance costs.

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NYC BUDGET REVIEWED BY INDEPENDENT BUDGET OFFICE

The IBO has released its review of Mayor bill deBlasio’s FY 2019 Executive Budget. According to IBO, the Executive Budget for 2018 and Financial Plan Through 2022 is reactive, with increased spending and increased revenues the product of forces largely outside the city’s control. Compared with his Preliminary Budget, the Mayor’s latest plan includes approximately $1 billion in additional city revenue in the current year, much of which results from one-time responses by business owners and investors to changes in federal tax law. We see this as a point of concern. Fortunately for the City, IBO projects that the city will end the current fiscal year with $774 million more in tax revenue than the de Blasio Administration estimates.

IBO’s current forecast for total 2018 tax revenues has increased since its March outlook by $882 million, or 1.5 percent. It projects that near-term strength in the U.S. and local economies will be followed by weaker growth over the next couple of years. As a result, it is expected that growth in city tax revenues will also slow, from an estimated 8.4 percent increase this year to a 3.2 percent rise in 2019, when collections will reach $60.8 billion.  IBO’s property tax forecast exceeds the Mayor’s projections by $210 million in 2018, rising to $1.0 billion in 2022, mostly due to the Mayor’s office carrying larger allowances for refunds, delinquencies, and cancellations. IBO’s estimates for the personal income tax and the general corporation tax are also consistently higher each year than the Mayor’s from 2018 through 2022.

Debt service and fringe benefit costs are the two largest drivers of overall expenditure growth, growing by an average of 8.4 percent and 7.0 percent annually from 2018 through 2022.  Department of Education spending is expected to grow by $2.7 billion from 2018 through 2022, the largest increase in agency expenditure in dollar terms in the plan. IBO’s economic forecast for the city anticipates a slowing of the pace of job creation throughout the plan period, accompanied, however, by low unemployment rates and an uptick in wage growth. The outlook for Wall Street profits— though not for financial sector job growth—is strong. While the commercial real estate market is recovering from its recent doldrums, the residential market has been weakening and at best moderate growth is projected for both.

IBO’s city economic forecast anticipates a slowing of the pace of job creation throughout the plan period, accompanied, however, by low unemployment rates and an uptick in wage growth. IBO expects the pace of New York City job creation to moderate in 2018 and then decelerate over the next three years. The health care forecast, and indeed the entire city employment forecast, depends on whether home health care services sustains its recent pace of growth. Home health care employment has doubled in New York City in just six years, from 82,100 in the first quarter of 2012 to 165,500 in the first quarter of 2018, accounting for nearly a third of all the reported job growth in this sector in the entire country.

 

Taxable real estate sales in New York City were $93.2 billion in 2017, the lowest level since 2012. Commercial sales were $37.8 billion, less than half their 2015 peak. Residential sales, however, were $55.4 billion, the highest level ever recorded before adjusting for inflation. Last year was the first year since 2010 that the value of residential sales in New York City exceeded that of commercial sales. IBO expects residential sales to drop over 10 percent in 2018, with the greatest decline in Manhattan. On the residential side, higher mortgage rates and recent policy changes that reduce the tax advantages of home ownership will exert downward pressure on sales growth.

So how does IBO think that that all of this will impact the City’s budget? Tax revenue is now expected to total $58.9 billion in 2018, $882 million more than in our forecast from two months ago, and $60.8 billion in 2019, up $553 million since March. The federal effect fades further in 2020 through 2022. By the final year of our forecast (2022), tax revenues are projected to total $69.0 billion, only $63 million higher than in our March forecast. For 2019 and subsequent years, the forecasts for all taxes other than personal income, unincorporated business, and sales have either been revised down or had only minor positive changes since March.

IBO projects that revenue growth will average 3.7 annually from 2018 through 2022, which would be the slowest four year annual average since the end of the Great Recession. Since the recession, the four-year average has ranged from a low of 4.9 percent (2013-2017) to a high of 6.6 percent (2009-2013). The real property tax is expected to show the steadiest and strongest growth, averaging 5.5 percent annually from 2018 through 2022. No other tax is projected to average more than 4.3 percent annually, with several—including the personal income tax—expected to average less than 2.0 percent annual growth between 2018 and 2022.

This gets us back to the issue of whether the deBlasio administrations practice of steadily increasing City spending is sustainable. IBO projects total city spending will be $90.1 billion in 2019 under the contours of the Mayor’s latest budget plan—$900 million more than the $89.2 billion we estimate spending will total this year. We project total spending will rise to $93.3 billion in 2020 and reach $98.3 billion in 2022. Adjusting for the use of prior budget surpluses to prepay some expenses for upcoming years, IBO anticipates total city spending will increase from $89.0 billion in 2018 to $92.9 billion next year and grow to $94.8 billion in 2020.

Much of the growth in spending the next four years is driven by increased spending in two areas: fringe benefits for city employees and debt service (note that most fringe benefits and all debt service are not carried within the budgets of city agencies). IBO estimates that in 2018 the city’s expenditure on debt service and fringe benefits will comprise 18.2 percent of the total budget. By 2022 these two expenses will make up 21.2 percent of the entire city budget. These are somewhat dangerous levels driven by discretionary actions of the last two administrations and they leave the City’s budget vulnerable in the event of a significant economic downturn. we remained concerned about this risk going forward in terms of the ongoing value of the City’s debt.

NEW YORK AND MINNESOTA SETTLE FEDERAL MEDICAID LAWSUIT

Earlier this month, a federal judge signed off on an agreement that dismisses a lawsuit undertaken by the states of Minnesota and New York and directs federal officials to consult with Minnesota and New York over a new funding formula for what is called a Basic Health Plan (BHP) under the federal Affordable Care Act. The judge’s order said if the states disagree with the new formula developed by the Trump administration, they have until Aug. 1 to ask that a court reopen the case for litigation.

The Affordable Care Act (ACA) provides tax credits for individuals at certain income levels who buy private health insurance via government-run exchanges. States that create a Basic Health Plan as an alternative for these consumers can tap a large chunk of the value of tax credits individuals would receive to purchase coverage on the exchange.

In January, Minnesota Attorney General Lori Swanson filed suit to stop a Trump administration decision that would terminate an estimated $130 million in annual payments to the state. Federal funds, including those targeted by the lawsuit, have been covering most of MinnesotaCare’s costs with the rest coming from enrollee premiums and state funding.

INITIAL RATINGS IMPACT OF FOXCONN PLANT IS NEGATIVE

Racine County, WI will be the location of the much ballyhooed Foxconn manufacturing facility which will benefit from many tax incentives from the State of Wisconsin. The location of the plant may in the long term have a positive credit impact on the nearby localities, the initial effect has been negative. This week, Moody’s announced that it was lowering its outlook on Racine County’s GO credit from stable to negative.

In taking the action, Moody’s cited the significant amount ($147 million) of short-term debt coming due on December 1, 2020.  this reflects two issues of b the significant amount ($147 million) of short-term debt coming due on December 1, 2020. This reflects issuance of two bond anticipation notes to finance the purchase of land for the new Foxconn development. This is outside of any tax incentive. This amount of short-term debt is very high in Moody’s view relative to the county’s total outstanding debt (73% of the county’s debt) and the county’s available internal liquidity ($46 million as of fiscal year end 2016). These risk factors also contributed to the negative outlook on the county’s long-term debt.

The negative outlook reflects a view that the county has taken on substantial short-term leverage that could pressure the GO rating should the county experience difficulty in securing take-out financing for the BANs. The rating could also be lowered if revenue generated directly or indirectly by the Foxconn development falls short of county expectations.

GEORGIA DEANNEXATION EFFORT COULD HAVE WIDE RANGING IMPACT

When Georgia Governor Nathan Deal said legislation he signed that would de-annex parts of Stockbridge to create a new, more affluent municipality was unlikely to influence the state’s AAA bond rating, he left local ratings outside of that view. That’s a good thing as Moody’s weighed in with an opinion.

Moody’s released a four-page analysis this week that found the plan to create a new Eagles Landing would be “credit negative” to more than just Stockbridge. “The bills are also credit negative for local governments in Georgia because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of the other,” according to Moody’s.

Stockbridge has $13 million of tax backed bank debt outstanding and $1.5 million of revenue bonds. The legislation did not address the issue of reallocation of the responsibility for that debt to either Eagles Landing or Henry County so it appears that the City will be stuck with those obligations in spite of a significant reduction in its tax base.

It is bad policy from any perspective and it would seem to violate the state’s moral obligation not to take any action which would undermine the ability of any of its underlying entities to meet their debt obligations.

 

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