Joseph Krist

Publisher

Publisher’s Note: We took an unanticipated hiatus to deal with some medical issues. We should be back to our weekly publishing schedule. We appreciate your indulgence.

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NEWARK WATER

It did not seem to get as much publicity as one might expect given that it is the state’s largest city but the lead pipe contamination situation facing Newark, NJ is moving towards a resolution. There was rightfully much concern about the potential costs of a remediation for a city which has long faced financial difficulties. It was clear that the cost of remediation would be substantial and that the City would need some outside financial assistance to address the water problem.

So it was very positive to see the news that federal legislation was signed that allows the State of New Jersey  to provide financial assistance to Newark  that would help the city remediate lead in its drinking water, a credit positive. State assistance, combined with $155 million Newark will receive from a settlement with the Port Authority of New York and New Jersey , would be used to service $120 million in debt the city plans to issue for the lead remediation.  The Port Authority settlement will generate $5 million upfront and $5 million per annum for 30 years.

The legislation permits the state to transfer certain federal funds to its drinking water revolving fund to be used for lead remediation. The state has not yet allocated or promised any of these monies to Newark. The $120 million debt issuance will increase Newark’s leverage, though the degree is limited. Debt will increase to 4.8% of fiscal 2019 equalized value or 1.06x 2017 current fund revenue, up from 4% and 0.88x.

The situation has shown that when governments get together to address situations like these, a resolution is possible. The Port Authority’s participation is key. So too is the fact that Essex County, where Newark is located, will be guaranteeing the city’s debt issuance. Because Essex has much stronger credit quality than Newark, the guarantee will help the city cut borrowing costs, which the city and county estimate could save Newark as much as $15 million over the life of the bond.

The situation in Newark has highlighted the significant use of lead piping especially to convey water to individual residences. The Governor has announced a plan to issue $500 million of bonds to pay for some of the costs of removal and replacement of existing lead piping. A proposal for a bond authorization would appear on the November 2020 ballot if such a plan is approved by the Legislature.

JEA PRIVATIZATION

Jacksonville Florida has taken the next step in its effort to divest itself of its integrated utility system. The City received 16 bids from a variety of private utility interests. Information about who the bidders are is not coming from the City which has adopted a somewhat opaque approach to the whole process. The bids were presented in sets of boxes which the City made a show of opening but concealing any details. JEA is using an unusual “invitation to negotiate” process that keeps information under wraps during the evaluation and negotiation stages. After JEA staff announces an intent to award all the records and tape-recordings of the meetings will become public record.

Nonetheless, some of the bidders disclosed their participation in the bidding. NextEra Energy, the parent company of Florida Power & Light, Duke Energy, and Emera, which owns Tampa Electric and Peoples Gas have disclosed that they have bid.  JEA will need to cover costs of eliminating several billion dollars of debt, $400 million in one-time customer rebates, $132 million in pension benefits for employees, $165 million in retention bonuses for JEA workers and a cash payment of at least $3 billion to City Hall. Estimates are that To purchase the entirety of JEA’s electric and water operations, a bidder would need to be able to pay at least in the range of $6.8 billion to $7.3 billion. 

There are arguments on both sides of the issue of the process being used by city officials. The opacity of the process is probably more comfortable for the private entities in the negotiation but it does raise issues of perception. This might raise some unnecessary barriers in the approval process. If the JEA board agrees to do a deal, it would go to the City Council for it to decide if the deal makes sense for city government and the community. The City Council can either approve or reject a deal. Approval would send the terms and conditions to Duval County voters for final say in a voter referendum.

The potential for unnecessary perception issues to arise has not gone unrecognized. The city Inspector General and Ethics Director have expressed their intention to sit in on the negotiations. The city is contacting inspector general offices throughout the country to see what “best practices” they use for such closed-door negotiations.  The Authority intends to decide over the next two weeks which respondents will move to the next stage of entering negotiations with JEA.

CALIFORNIA UPGRADE

Moody’s Investors Service has upgraded to Aa2 from Aa3 the rating on the State of California’s outstanding general obligation (GO) bonds. Here’s their rationale. ” The upgrade of California’s GO bonds to Aa2 incorporates continued expansion of the state’s massive, diverse and dynamic economy and corresponding growth in revenue. The action also recognizes the state government’s disciplined approach to managing revenue growth indicated by its use of surplus funds to build reserves and pay down long-term liabilities. At the upgraded rating, these strengths balance several challenges that will persist. The most significant challenges include high revenue volatility given the state’s heavy reliance on income taxes, lower flexibility to adjust spending and raise revenue compared to other states, and above average leverage and fixed cost burdens. The upgraded rating still reflects certain social challenges relative to other US states. These include a high rate of poverty when accounting for the state’s elevated cost of living, and very expansive public support of the lower income population that would present the state with difficult spending and policy decisions in the event of reduced financial support from the US government.”

Well now we have until the next recession to see if the California credit has become any less exposed to its historic level of volatility, reflecting its income tax dependence on a relatively small percentage of taxpayers at the high end of the income scale. The State still faces awesome capital needs and its increasingly difficult housing market is becoming problematic for the economy. The state also faces issues from federal immigration policies which contribute to reductions in population in certain primarily urban areas. Historically in many cities, immigrants make up for the well documented phenomenon of population movements in search of more affordable housing costs. These, along with pension and climate related costs, weigh on a potentially higher rating.

PR CREDITORS HAVE THEIR DAY AT THE SUPREME COURT

The Supreme Court heard arguments in the challenge to the authority of the PROMESA financial control board. The creditors in this case contend that the board was appointed in violation of the US Constitution. The dispute is over whether the oversight board supervising Puerto Rico’s finances is actually a federal agency whose members must be presidential nominees confirmed by the Senate, or an entity structured by Congress under its authority to administer the U.S. territories. To date, it has operated as a Congressionally structured entity.

Aurelius has a heavyweight counsel representing them before the Court, Ted Olson. That didn’t prevent the justices from challenging the Aurelius arguments. Aurelius has historically taken aggressive stands in other sovereign debt cases. This time, Justice Brett Kavanaugh suggested that if the creditors’ definition of a federal officer requiring Senate confirmation was correct, it could put territorial self-government in jeopardy.

The Board argues that Congress specifically invoked its territorial powers in creating the board, directed it to work in Puerto Rico’s interest and insulated its members from political interference by giving them three-year terms during which they could be removed only for cause. This led to Justice Sotomayor to ask “How you can label this a territorial officer as opposed to a federal officer…when none of the people of Puerto Rico have voted?”

When the federal appeals court in Boston ruled in February that the board’s members were federal officers requiring Senate confirmation. At the same time, it suggested a remedy – the Senate could vote to confirm the members—President Obama’s appointees who, as a backstop, subsequently were nominated by President Trump. That was noted by the Justices who suggested that this could be accomplished quickly, obviating the need to dismantle the board and throw a huge delay into the debt restructuring process.

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