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.

 

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