Joseph Krist

Publisher

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ISSUE OF THE WEEK

$588,025,000

COUNTY OF SACRAMENTO, CA

Airport System Revenue

Senior and Subordinate Lien

Moody’s: A2/A3  S&P: A+/A

The proposed senior and subordinate bonds are secured by a pledge of net general airport revenues, with a prior claim of these revenues by the senior lien bonds. The subordinate lien bonds can be additionally supported by PFC revenues, but are not pledged.

The County of Sacramento owns and operates the Sacramento County Airport System, which includes four airports: the Sacramento International Airport, Mather Airport, Executive Airport, and Franklin Field. The main passenger airport for Sacramento County is the Sacramento International Airport, which is comprised of two terminal buildings, and offers service to domestic and international destinations.

A growing service area economy reflected in steady population growth at the county level, the opening of the Golden One Center arena in downtown Sacramento in October 2016, the expansion of the Sacramento Convention Center, and the opening of Amazon’s 10th fulfillment center in October 2017 support the rating. Strong financial management of the airport is reflected in solid financial metrics, a diverse mix of air carriers and an expectation of no additional general airport revenue bonds (GARBs). This is based on a perception of ample capacity to expand service in existing facilities. Pressures on the rating are the airport’s high leverage as well as a high airline cost per enplanement (CPE). These would likely decrease with traffic and revenue growth and no new debt issuance expected during the outlook period.

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CALIFORNIA REVENUE UPDATE

California’s total revenues of $8.02 billion for March were higher than estimates in the governor’s 2018-19 proposed budget by 6.0 percent, and above 2017-18 Budget Act projections by 10.8 percent, according to the monthly revenue report from State Controller Betty T. Yee. For the fiscal year overall, the “big three” sources of General Fund revenue–personal income tax (PIT), retail sales and use tax, and corporation tax–are beating estimates in the enacted budget. For the first nine months of the 2017-18 fiscal year, total revenues of $89.10 billion are 3.4 percent higher than expected in the January budget proposal and 6.4 percent above the enacted budget’s assumptions.

For March, PIT receipts of $4.22 billion were 6.2 percent higher than the 2017-18 Budget Act’s projections, but 4.2 percent lower than anticipated in the proposed budget. For the fiscal year, PIT receipts are $3.17 billion higher than expected in the 2017-18 Budget Act. Corporation taxes for March of $1.31 billion were $549.2 million, or 72.4 percent, higher than forecasted in the governor’s proposed budget. This variance is largely because receipts were about $530 million more than anticipated. For the fiscal year to date, total corporation tax receipts are 32.5 percent above assumptions in the 2017-18 Budget Act. Sales tax receipts of $2.06 billion for March were $10.4 million lower than anticipated in the governor’s budget proposal unveiled in January. For the fiscal year, sales tax receipts are $410.1 million higher than the enacted budget’s expectations.

Unused borrowable resources through March exceeded revised projections by 41.0 percent. Outstanding loans of $11.84 billion were $5.18 billion less than expected in the governor’s proposed budget and $6.43 billion less than 2017-18 Budget Act estimated the state would need by the end of March. The loans were financed entirely by borrowing from internal state funds.

WHY THE NEW YORK CITY HOUSING AUTHORITY CRISES ARE NOT A CREDIT EVENT

The announcement that the chief executive of the New York City Housing Authority would leave her post at the end of April was not a surprise to observers of the Authority’s recent history. Scandals surrounding lead paint mitigation, inadequate capital maintenance, and a failure to provide heat made her position untenable. The Housing Authority’s operations had become yet another political conflict between the Mayor and the Governor of New York. The NYS budget for the fiscal year included funds to address immediate capital repair needs of the authority tied to oversight by the State.  The city is in ongoing negotiations with federal prosecutors who in 2016 began an expansive inquiry into conditions in the city’s housing developments; the mayor has said that could result in a federal monitor for the authority, which already has a court-appointed special master to address mold.

NYCHA is in the front line of the City’s ongoing battle to provide affordable housing for low income New Yorkers. 257,143 families are on the waiting list for public housing.  146,808 families are on the waiting list for Section 8 housing. 15,096 applicants are on both waiting lists. There was a 2.6 percent turnover rate for public housing apartments in 2016 and there is a  0.7 percent vacancy rate of apartments available. Changes and challenges to federal financing for public housing programs have dampened issuance directly by NYCHA.

So it is important that the City’s Housing development Corporation be able to regularly access the public capital markets to finance ongoing development of new multifamily housing units. To finance NYCHA’s capital needs, the HDC issues bonds secured by a pledge of revenues received by NYCHA from the federal government annually appropriated by Congress under the Capital Grant Program. These funds are intended primarily to finance capital maintenance needs for upkeep of existing facilities.

The fact that the recent omnibus spending bill enacted by Congress includes increased funding for the program is credit positive. The change in leadership at NYCHA presents a huge opportunity for improved management and execution and could provide an improved negotiating position for NYCHA in its ongoing negotiations with the federal government. Our view is that additional oversight would only improve the support for funding under the Capital Grant program and would therefore be credit positive for bondholders.

POLITICS INTRUDE ON NJ TOBACCO BOND REFUNDING

The son of the former Governor of New Jersey issued a letter threatening legal action in an attempt to delay or prevent the formal closing on the State’s recent issue of refunding bonds. State Senator Ton Kean, Jr. issued a letter to the State Treasurer describing the refunding bonds as a “restructuring” of an existing issue rather than a refunding which usually results in the funding of debt service on the original issue and ultimately results in the original bonds being defeased and no longer considered outstanding under the authorizing bond resolution.

The distinction is important as the Senator cites the provisions of Article 8, Section 2, Paragraph 3 of the New Jersey Constitution which provides that all debt must be discharged within thirty-five years from the time it is contracted. The debt effectively being refunded by the Tobacco Settlement Financing Corporation was first issued in 2003 and the latest discharge date under the New Jersey Constitution would be 2038. However, under the pending restructuring, the final maturity (2046) is 8 years beyond this deadline. The flaw in the argument is the interchangeable use of the terms refunding and restructuring. If the original bonds are refunded, defeased, and ultimately discharged than it would seem that the newly issued refunding bonds fall within the maturity requirements of Article 8.

The real motive would seem to be an effort to draw attention to budget positions taken by various members of the NJ legislature. The letter calls the deal a $250 million one-shot budget gimmick. It is not surprising that an increased level of partisanship should be observed in the first budget process to occur under a new Governor. So we were surprised when the tobacco bonds successfully closed. Efforts like this often occur when bond issues can be used as a vehicle for political disputes but there has usually been too much sound legal work done to construct them to see those efforts bear any fruit. The Senator ends up looking naive at best.

LOCAL PENSION TROUBLES TRIGGER STATE WITHHOLDING

The City of Harvey, Illinois is a southside suburb of the City of Chicago. Like many Illinois municipalities, the City has significant unfunded pension liabilities. The State of Illinois has decided to withhold some $1.4 million of state aid from the City to cover pension costs that have gone unpaid for years. The city has sued the Illinois State Comptroller’s office, seeking to force the state to release the funds but in the interim is expected to lay off about 30 people working in the police and fire departments.

State Comptroller Susana Mendoza said “the legislature passed a law allowing pension funds to certify to our office that local governments have failed to make required payments to pension funds. The local government has a chance to respond. Once it’s certified, the law requires us to redirect the payments to the pension fund – the Comptroller’s Office has no choice. A judge ruled Monday in favor of the Harvey Police Pension Fund and against the City of Harvey’s request to stop this process, saying the funds were appropriately put on hold. The Comptroller’s Office does not want to see any Harvey employees harmed or any Harvey residents put at risk, but the law does not give the Comptroller discretion in this case.”

Without the funding being held by the state, Harvey officials said there might not be enough money to continue making payroll after Friday. The City contends that it is appropriating sufficiently for pensions but the State disagrees. The Comptroller said it’s up to the city and the police officers’ pension fund to negotiate a deal that would allow the state to release funding for the Harvey payroll.

BROADBAND AT A CROSSROADS IN KENTUCKY

Kentucky Wired started in 2015 with the goal of extending high-speed internet across the state. The plan was to install 3,400 miles of fiber-optic cable, much of it strung on existing utility poles. This would create an access point in each county to high-speed service which would then be provided through private services to individual locations. The project was designed to bring the service to the Commonwealth’s many residents who do not have access. It was seen as a key factor in the Commonwealth’s continuing transformation of its rural economies.

It is a public-private project, with privately-issued bonds to pay for it and a private company, Macquarie Capital of Australia, building and operating it. Much of its revenue would come from providing internet service to state offices. The entire project was originally planned for completion by late 2018. That schedule has fallen behind as the result of delays in getting permission to attach the cable to poles owned by telephone companies and others.

These delays have slowed the revenue flow that was designed to pay contractors doing the installation work. The contractor has made claims for payments related to those delays which were not part of the original project budget, and the state has to pay some $8 million to satisfy some of those claims. State officials worked out a deal with the private-sector partners in the project to resolve the outstanding claims and reset the construction schedule for completion in mid 2020. Like many P3 projects, the contracts would include incentives for ahead of schedule  completion.

The transaction needs legislative approval for funding and a vehicle, Senate Bill 223, which would have given the network authority the ability to borrow another $110 million for the project.  $88 million of that funding would deal with claims and create funding contingencies. The total project cost would come in at $342 million. Now the bill is running into opposition in the Legislature and the Governor has warned that not making good on the contract to build the broadband network would hurt the state, leaving taxpayers potentially facing hundreds of millions in costs, but with no network to show for it and no revenue from it to pay those costs.

Some legislators object to the state providing infrastructure to support a profit making service. The dispute however, is calling into question the State’s willingness to meet obligations which rely on state appropriations. This is crucial as Kentucky is one of the states which relies on appropriation backed debt to finance the vast majority of its capital needs. The legislature did not set aside money in the General Fund to make payments the state owes Macquarie for operating the network and repaying the bonds, called availability payments. However, legislators designated money in the state’s budget reserve fund, the rainy day fund, to make the payments to Macquarie.

Fitch Ratings said in a report this week that the failure of the legislature to authorize funding for the settlement through SB 223 or another mechanism “threatens the viability of the settlement agreement and the project itself.” A failure to complete the deal could raise issues about the relative creditworthiness of appropriation backed deals which could hurt the Commonwealth’s ratings.

BLUEGRASS EDUCATION FUNDING

Kentucky was another state facing protests by teachers over the level of state aid to education. Unlike other states where protests focused on teacher wages, this time the issue was overall education funding. The protests had forced some 30 districts to close as teachers converged on the state capitol. This time the effort succeeded.

The two-year state operating budget includes record new spending for public education, fueled by a 50-cent increase in the cigarette tax and a 6 percent sales tax on some services, including home and auto repairs. Kentucky lawmakers voted to override the Republican governor’s veto of a two-year state budget that increases public education spending with the help of a more than $480 million tax increase.

The teachers protest followed the enactment of a pension reform bill which will no longer guarantee defined retirement benefits to new teachers. Instead, they will be placed into a “hybrid” retirement plan that includes features of both a traditional pension — like teachers in Kentucky have now — and a 401(k)-style savings plan. In this hybrid plan, teachers would contribute 9.1 percent of their salary to the plan, while employers would contribute 8 percent. The plan is portable, meaning that if future teachers decide to leave Kentucky public schools, they can take their plan and benefits with them. The bill does not include any reduction in annual cost-of-living increases for retired teachers, leaving them at 1.5 percent. Earlier versions of the pension bill had proposed not only reducing the adjustment, but also freezing it for five years.

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