Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,400,000,000

NEW YORK TRANSPORTATION DEVELOPMENT CORPORATION

Special Facilities Revenue Bonds, Series 2018

(Delta Air Lines, Inc. – LaGuardia Airport Terminals

C&D Redevelopment Project)

While New York’s LaGuardia Airport is undertaking a complete replacement of its main terminal, Delta Airlines is undertaking an upgrade of its own standalone terminal facilities.

Right now is a fine time from an airlines perspective to be issuing special facilities debt secured by its own credit. Oil prices are relatively favorable, planes are flying at high capacity factors, and the consolidation of the domestic US air market has created significantly reduced competition in the industry. This has resulted in a period of profitability for carriers which is significantly improved from the last boom period of airline issuance.

The security for the bonds includes leasehold mortgage language and other provisions but at the end of the day the Bonds are effectively secured under an unsecured guaranty of Delta Airlines. The project includes the demolition of Delta’s existing facilities and their replacement. Effectively, there will be periods of time when there is less physical asset security than is equal to the value of the Bonds outstanding. Hence, the rating of the Bonds is on parity with the airline’s unsecured debt.

It is important to remember that any unsecured financing of airline special facilities bonds is backed by general economic risk (this economic expansion has been exceptionally long and driven by policy and other factors which may make any response to an economic downturn problematic), the industry risk of a historically cyclical business, the fact that on a net basis the airline industry as a whole is inherently unprofitable over nearly a century of operating history  We have seen since the turn of the century the vulnerability of the industry to a variety of external risks significantly beyond the airlines’ control.

We point all of this out, not in anticipation of default and/or bankruptcy, but as a reminder that investors should ask for a yield premium reflective of the fact that this issuance is occurring at an optimal time for the borrower. Coupon protection is important when the downside risk is likely greater than the upside risk associated with investment in unsecured airline debt.

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MISSISSIPPI BRIDGE CRISIS

Recently, Mississippi Governor Phil Bryant declared a state of emergency resulting in  the nearly immediate closure of 102 locally owned and managed bridges across the state. They were determined  to have significant structural deficiencies that posed immediate safety risks. The situation will put new negative credit pressure on Mississippi counties, the primary local governments responsible for bridge maintenance. The state itself will also face pressure to develop new capital funds to pay for needed infrastructure upgrades.

The state of emergency followed the US Department of Transportation (DOT) notification to the state that numerous bridges were out of compliance with national bridge inspection standards, and that failure to close the identified structures could result in reduced federal aid for the Mississippi Department of Transportation. According to the DOT, 2,008, or 12%, of the state’s 17,012 bridges are structurally deficient. This share is higher than the nationwide state median of 9% of all bridges.

In spite of the notification, the legislature authorized only $50 million in bonds for infrastructure needs for fiscal 2019 (which ends 30 June 2019). That is however,  $30 million more than the usual authorization. The state estimates an additional $40-$50 million will be needed for local bridge repairs, in addition to approximately $400 million The Governor is considering calling a special session of the legislature to develop an infrastructure plan. The number of locally owned and managed closed bridges now totals 644 statewide, with the county median of closed bridges at 4%.

The State’s credit outlook is already negative. The need for additional capital funding and a likely increase in debt associated with it will make it harder for the State to retain its current Aa2 rating on its GO debt.

PR FISCAL BOARD PUTS FORTH FINANCIAL PLANS

The Financial Oversight and Management Board for Puerto Rico voted and certified its own version of fiscal plans for the commonwealth, the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Aqueduct & Sewer Authority (PRASA). The vote came despite government efforts to convince the fiscal oversight board that its own fiscal plans unveiled April 5 achieved savings and complied with the Promesa law. The governor and several lawmakers rejected the fiscal plans. Fiscal board Chairman José Carrion said that if the governor does not implement the plans as approved, “we would have to consult with our lawyers.”

The government continued to object board-sought cuts of over 10% to pensions, which are unfunded by about $50 billion, and the repeal of labor protection laws, including the elimination of the statutory Christmas Bonus and two-week vacation and sick leave. The fiscal plan proposed by the board would make Puerto Rico an at-will employment jurisdiction, which allows employers to dismiss workers for any reason. The plan also calls for raising the minimum wage 25 cents to people older than 25. The board-certified fiscal plan estimates labor reform could raise $330 million for the government, but any related changes will require legislative approval.

The board’s version of the commonwealth fiscal plan achieves a $1.6 billion surplus, some of which may be used to pay debt, compared to a surplus of $1.4 billion in the government’s plan. The board’s document reflects a 6% increase in revenue and an 11% spending reduction. The board contends that if the government were not to implement labor or energy reforms, the island would be back in deficit by 2029.

KENTUCKY FILES OPIOID LAWSUIT

The state of Kentucky has filed suit against Johnson & Johnson and two of its subsidiaries over what the state’s attorney general alleges was a deceptive marketing campaign that caused widespread addiction to opioid-based prescription painkillers. The lawsuit seeks repayment for Kentucky’s “Medicaid, workers’ compensation, and other spending on opioids, disgorgement of Janssen’s unjust profits, civil penalties for its egregious violations of law, compensatory and punitive damages, injunctive relief, and abatement of the public nuisance Janssen has helped create.

The suit was filed in state court so it is a distinct action away from suits filed by other states. Arkansas, Louisiana, Mississippi, Missouri, New Mexico, Ohio, Oklahoma and South Dakota have also sued the company. Kentucky has a high rate of opioid use. The suit claims 1,404 people in Kentucky died from drug overdoses in 2016. the state had an opioid prescribing rate of about 97 prescriptions per 100 individuals.

ARIZONA TEACHER STRIKE

Teachers in Arizona voted Thursday night to launch the state’s first statewide teachers’ strike for this week. Seventy-eight percent of school employees voted in favor of the walkout, which will begin this Thursday. Arizona’s Gov. Doug Ducey (R) has proposed and supports legislation to provide the state’s teachers with a 20% raise by 2020. The strike is intended to pressure the legislature to enact the plan.

Teachers in the state are among the lowest paid in the nation, with the average salary for a state teacher sitting at $48,372. Union organizers want to see that number raised by at least $10,000. The move follows successful efforts in West Virginia and Oklahoma to obtain pay increases for teachers and other school personnel. Other personnel voting to strike included crossing guards and cafeteria workers.

The specific demands of the school teachers and employees include 20 percent salary increase: According to an analysis by the Arizona School Boards Association published in January, the median teacher pay in 2018 is $46,949. A 20 percent increase would amount to $9,390, for a total of $56,339; restore education funding to 2008 levels: This would require adding about $1 billion more in state funding to education. Arizona spends $924 less per student in inflation-adjusted dollars today than it did in 2008, according to the Joint Legislative Budget Committee; competitive pay for all education support staff. Ducey’s proposal does not include raises for these individuals; permanent salary structure, including annual raises; no new tax cuts until per-pupil finding reaches the national average. According to the U.S. Census Bureau’s 2015 figures, the most recent available, Arizona spent $7,489 per pupil, compared with the national average of $11,392.

In the end, the debate will be about funding and whether the revenues can be found to support it. It is not considered likely that the legislature will approve new taxes to fund the increases so the debate over how to fund raises is expected to be fierce.

CONGRESS QUESTIONS BRIGHTLINE’S USE OF PAB DEBT

At a hearing before the House Subcommittee on Government Operations, Brightline President Patrick Goddard and U.S. Department of Transportation official Grover Burthey were questioned harshly about how the railroad project qualified for the tax-exempt bonds. The Committee chair and Freedom Caucus leader Rep. Mark Meadows indicated that he believed that the use of such financing for the privately owned and operated high speed railway was inappropriate.

Two committee members highlighted an aspect of the project which we have criticized for some time. That is the potential inconsistency of All Aboard Florida instances that it is getting no government money, while federal rules require that PABs can be used only on projects that are, in fact, getting federal money.

The railroad tracks between West Palm Beach and Cocoa have received $9 million in federal money for street crossing upgrades. That Brighline insists, makes the railroad route eligible, even though the money was used to improve the streets crossing the tracks, not the railroad itself; and even though the tracks are not owned by Brightline, but by the Florida East Coast Railway.

Committee members indicated that they considered all surface transportation projects to be roads by definition, not railroads. The chairman indicated  that “I do not see this as fitting the definition of surface transportation, not any, even if you read the statute, it doesn’t seem to apply. So at this point I have a real concern that the intent of Congress is being overridden on the Private Activity Bond measure here.”

TRANSPORTATION ON THE BALLOT

Voters in Nashville have begun early voting on a $5.4 billion transportation plan designed to address growing downtown congestion and a perceived increase in demand for mass transit in the city. The ambitious plan incorporates high capacity buses, designated bus lanes, a tunnel designed to facilitate through traffic in the downtown, and a light rail system. Funding for the plan would come primarily from reliance on increased sales taxes derived primarily from the city’s significant tourist industry and, in the case of the light rail component, a healthy share of federal assistance.

Critics of the plan which will fully unfold over a 15 year time period insist that it relies on the current state of technology and would lock the city into a system that could be effectively obsolete upon completion. The debate centers around peoples individual views as to the pace of technological change and whether or not that change will occur as quickly as proponents suggest. Some referendum critics contend that light rail will be too expensive, rely too heavily on uncertain federal funding, and not attract enough riders. One group, Plan B, has floated a separate alternative that consists of a fleet of vans that use rideshare technology. Initiative supporters argue that the reliability and implementation of technology like autonomous vehicles is too far away to rely solely on it. Once it is functional, they say it would work in tandem with light rail and other high-capacity transit.

Omaha, Nebraska voters will have a chance in May to vote on a $151 million bond authorization to fund a variety of improvement and expansion projects to facilitate transportation in the City. The proceeds would be applied to a range of street and road improvements including widening and extensions to the city’s street and bridge system over a six year period. Proponents say that the debt can be financed without a tax increase.

SPORTS FACILITIES IN THE POST TAX BILL ERA

Spokane County, Washington commissioners approved issuance of $25 million in bonds to help build the Spokane Sportsplex – a proposed multiuse sports facility with capacity to host national and local events. The $42 million Sportsplex would include a multipurpose fieldhouse with a 200-meter, six-lane indoor hydraulic banked track, 17 volleyball courts, 10 basketball courts, 21 wrestling mats and an NHL-sized ice rink with 1,000 seats.

Funding for the Sportsplex is to be accomplished through a combination of $11 million in bond reserve funds from the facilities district which owns and operates the Spokane Veterans Memorial Arena, the INB Performing Arts Center and the Spokane Convention Center, $5 million from the city of Spokane and $2 million from a state capital budget request – in addition to $25 million in bonds from the county.

Those county bonds would be repaid over 25 years through lodging and sales tax generated from tourism. The district’s lodging tax allocation committee also pledged $5 million to cover any shortfall in revenue or operating losses for the first five years.

A ballot measure to fund construction costs for the Sportsplex was considered, but the county withdrew the measure citing increased taxpayer burden. The new financing structure does not require a public vote because existing tax dollars already generated will be used to fund the project. A study commissioned by the Sportsplex estimates that the facilities would generate $33 million in direct tourism spending with an estimated 46,000 annual hotel stays.

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