Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,699,495,000

GOLDEN STATE TOBACCO SECURITIZATION CORPORATION

Tobacco Settlement Asset-Backed Bonds

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

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

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

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

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WAYNE COUNTY, MI MAKES THE GRADE

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

 

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

BUDGET BLUES RETURN TO NEW JERSEY

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

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

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

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

ALASKA BUDGET BREAKS NEW TRAIL

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

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

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

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

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

HOSPITAL CONSOLIDATION YIELDS RATING INCREASE

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

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

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

DALLAS COUNTY SCHOOLS DEFAULT

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

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

RHODE ISLAND PENSION REFORM WITHSTANDS CHALLENGE

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

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

PROVIDENCE GETS A POSITIVE OUTLOOK

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

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

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

NEW MEXICO DOWNGRADED AGAIN

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

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

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

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

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