Joseph Krist

Publisher

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ISSUES OF THE WEEK

$580,000,000

Port of Seattle, Washington

Intermediate Lien Revenue Bonds

Moody’s: A1

The Port issues debt secured by revenues from its overall Port operations. In reality, this is an airport credit as 80% of consolidated operating revenue and 90% of the debt outstanding is connected to the airport.

The port operates Seattle-Tacoma International Airport (SEA). In addition to the airport, the port owns and operates maritime facilities and industrial and commercial properties. The port also owns container terminals and has licensed these terminals and certain industrial properties to the Seaport Alliance. The formation of the Northwest Seaport Alliance (“NWSA”) – the port’s joint venture with Port of Tacoma – serves as a stabilizing element of the port’s credit profile by sharing in operating risk, profit and capital spending for marine cargo operations in the overall Puget Sound region.

The airport is implementing a large $3 billion capital program over the next five years. $1.9 billion of new debt will be issued to fund the project which the construction of four major projects at active/operating terminals. The Port’s debt is secured by a rate covenant that provides for 1.10 times (as first adjusted) or 1.25 times (as second adjusted) coverage of annual debt service. The intermediate lien bonds are further secured by a cash funded common debt service reserve fund.

$1,100,000,000

Southeast Alabama Gas District

Gas Supply Revenue Bonds

Fitch: A

The District (SGS) was created by 14 Alabama communities to acquire, manage, and finance supplies of natural gas on behalf of certain public gas systems. It accomplishes this by entering into pre-paid gas supply contracts in order to lock in favorable prices for its individual system participants. Debt is secured by a pledge of the net revenues of the District. The risk of individual payment shortfalls is mitigated by an agreement with Morgan Stanley to purchase receivables under a guaranty from MS.

If the SGS provides notice to MSCG to remarket gas to other purchasers that it does not need, or does not accept delivered gas, MSCG is required to remarket such gas. If the gas cannot be remarketed, MSCG is required to purchase the gas for its own account. SGS anticipates approximately 25 public gas systems will participate in the SGS Project No. 2 transaction. The receivables purchase agreement with Morgan Stanley is intended to offset the risk of individual participant nonperformance.

SGS anticipates approximately 25 public gas systems will participate in the SGS Project No. 2 transaction. As a result, the rating for the deal reflects the credit rating of Morgan Stanley.

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VIRGINIA MEDICAID EXPANSION

The expansion of Medicaid under the provisions of the affordable Care Act (ACA) has been a priority of Virginia democrats which could not overcome opposition from the other side of aisle for the entirety of the McAuliffe administration. The election of a Democratic governor and the near capture of the Virginia House last November has changed the political calculus. This resulted in last week’s votes to expand Medicaid to cover an additional 400,000 Commonwealth residents.

The measure includes a requirement that many adult recipients who don’t have a disability either work or volunteer as a condition of receiving Medicaid. That was the price established to get a legislative majority. The federal government shares the overall cost of Medicaid with the states; the program covers about 75 million Americans, or 1 in 5.

The state currently has one of the most restrictive Medicaid programs in the country, covering mostly children and disabled adults. Childless adults are not eligible, and working parents earnings are limited to no more than 30 percent of the federal poverty level, or $5,727 a year. The Affordable Care Act allows states to expand Medicaid to adults earning up to 138 percent of the poverty level, which comes out to $16,643 for an individual.

To finance the Commonwealth’s share of the cost, it will tax hospitals to generate revenue for the state’s 10 percent share of the roughly $2 billion annual cost.

PUERTO RICO AID APPROVALS PLAY CATCH UP

The Federal Emergency Management Agency (FEMA) has awarded nearly $219 million in additional public assistance grants to government organizations and private non-profit organizations for Hurricane María recovery in Puerto Rico. As of May 30, FEMA says its Public Assistance program has “obligated $2.2 billion in total funding” to the government of Puerto Rico and municipalities for debris removal and “emergency protective measures,” which are “actions taken to eliminate or lessen immediate threats either to lives, public health or safety, or significant additional damage to public or private property in a cost-effective manner.”

The U.S. Department of Transportation’s Federal Transit Administration (FTA) announced the allocation of $277.5 million in emergency relief funding for public transportation systems damaged by hurricanes Harvey, Irma and Maria. About $232.3 million will be “dedicated to response, recovery, and rebuilding projects, with $44.2 million going toward resiliency projects.” Of the total, $220 million or just under 80% of the funds will go to Puerto Rico.

The announcements accompanied the beginning of the 2019 hurricane season. Concerns continue about Puerto Rico’s readiness in the event of another significant storm this year. The Puerto Rico Aqueduct and Sewer Authority delivered a mixed message when it said that it has the generators needed to support the island’s sewage system; however, it said, 550 generators, or nearly 50%, are still needed to keep the potable water system running in case of a prolonged blackout.

ON LINE TAX DECISION WILL SPUR CHANGES

It is not clear that the Supreme Court will rule in favor of the State of South Dakota in the Wayfair case, a suit that will determine policies to tax online merchandise sales by states and localities. It is also not clear as to the terms and requirements which tax collection entities will have to contend with in order to collect those taxes.

This was the subject of discussion at the Annual Meeting of the National Federation of Municipal Analysts last week. According to the National Council of State Legislatures, on line sales comprise 11% of overall sales and have been increasing at a rate of 15% annually. If South Dakota loses, states will be forced  to adopt individual legislation to deal with the “physical presence” rule. States have three broad ways to deal with the issue.

They could alter “nexus creation” requirements to establish what constitutes a “presence” in a state for taxing purposes. They could require “referral marketplaces” (like Airbnb) to collect and remit sales taxes for sales facilitated through those marketplaces. A third alternative is to establish reporting requirements for those marketplaces enabling states to follow up and collect sales taxes. Minnesota, Colorado,  and Washington have enacted such provisions.

NEW YORK’S EVER INCREASING CAPITAL NEEDS

The budget season for New York State and City has been a relatively tame process compared to other years. The lack of significant concern about the next fiscal year’s budget has allowed for concerns about capital needs to take second place in the debate over the long term fiscal outlook for both entities. Nonetheless, there is an emerging concern about the capital needs of two entities – the Metropolitan Transportation Authority and the New York City Housing Authority.

The needs of both are being highlighted by proposed plans to address the ongoing maintenance and capital facilities renewal needs of both of these entities. The MTA has garnered the most attention with the recent proposal by the newly appointed head of the Authority for a renewal plan to address capital related operating issues which have  generated much angst among the NYC subway system’s millions of riders. The plan has been assigned a price tag of some $19 billion and has revived debate about the funding responsibilities of the state, city, and federal governments in terms of the upkeep of existing facilities.

The issue of the capital needs of the Housing Authority has arisen in conjunction with the establishment of federal oversight of the Authority’s operations, especially as they pertain to funding and execution of its facilities maintenance. The New York City Housing Authority is chartered by the state, funded by rents and federal subsidies, but operated by the city. The many shortcomings of the Authority’s management of those two areas as well as instances of false reporting which raised concerns about the Authority’s ability to continue to receive federal funds. The Authority has estimated that its projects, which house 180,000 New Yorkers, need a capital investment of $20 billion.

In both cases, the state and the city will have to find resources in addition to those funds already being committed to the process. The exact proportion of responsibility is the heart of the issue. Both situations are accompanied by a sense of urgency and visibility and the solution to both problems is not eased by delay in addressing the issue. NYCHA will likely be forced to increase spending under a pending consent decree arrangement with the federal government.

So if the estimates are right, two major entities face a nearly $40 billion need for capital funding at a time of decreased federal support for both. Looking at the long-term fiscal outlook for the federal government, a substantial increase in federal funding is not necessarily viable. So diffusing this debt bomb will be a delicate task for the state and city.

VIRGIN ISLANDS OFFER FY 2019 BUDGET

The U.S. Virgin Islands Gov. Kenneth Mapp presented his proposed fiscal year 2019 budget to the VI legislature. The territory’s pension system gets special attention. In his budget the governor proposed increasing the employer contribution to the system by three percentage points each year in the coming three fiscal years. It is currently at 20.5% of payroll. Mapp said without action the pension system would be insolvent by fiscal year 2024.

Mapp proposes having the Virgin Islands Housing Finance Authority and Community Development Block Grant-Disaster Recovery be used to purchase nonperforming assets that the pension system currently owns. This meant to increase liquidity in the pension funds. A third leg of the plan would require higher paid government employees to make even larger pension fund contributions.

Even after all of this, the plan would shift the insolvency date back by one year to fiscal 2025. As for the rest of the budget, austerity is not a theme. Salaries would be raised 3% and the Governor hopes to lower water rates. Combined with the ongoing recovery efforts, it is not really clear how realistic this budget proposal is.

HIGH SPEED RAIL

The consortium which owns and operates Florida’s Brightline high speed rail project will continue to refer to itself as a private enterprise. That notion however, is weakened with the news that it has received an extension of its deadline to issue tax exempt private activity bonds to finance the second segment of its proposed project. The decision by the US DOT reflects a significant effort by project proponents to overcome a split Florida Congressional delegation.

It has been a contention here that the project is actually very dependent upon tax exempt financing to finish the project. No matter how the bonds are structured and placed, the subsidy provided to the project undermines the argument that this is a project can stand on its own merits as a privately financed endeavor. The fact that Brightline has been so persistent about its pursuit of tax exempt financing and the view that its inability to attract sufficient private capital has driven that persistence drives our skepticism about project viability.

U.S. Rep. Brian Mast, R-Palm City said “The fact that Brightline needed to request an extension underscores that their business model is questionable at best without taxpayer subsidies.”  The railroad has sought the financing authorization under surface transportation programs initially intended for highway development. This has raised issues with Congressional budget hawks regarding the funding authorization.

Brightline officials have said they also are pursuing a $1.75 billion federal Railroad Rehabilitation & Improvement Financing loan. Either funding method would reflect some level of federal subsidy for the project.

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