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.

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