Joseph Krist

Publisher

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ISSUE OF THE WEEK

$750 million

New York City Transitional Finance Authority’s (TFA)

Future Tax Secured Subordinate Bonds

Moody’s: Aa1

It may be a short week but what better time for a well known tried and true credit to make another appearance in the market. New York City Transitional Finance Authority bonds offer investors an opportunity to invest in the City while remaining somewhat insulated from the City’s general credit. The state legislature established TFA as a separate and distinct legal entity from the city. It did not grant TFA itself the right to file for bankruptcy. So there is that legal protection.

In terms of the City’s year to year financial operations, the statutory authorization for the bonds provides that both the city and the state retain the right to alter the statutory structure that secures TFA’s bonds. The city has covenanted not to exercise those rights related to personal income taxes if debt service coverage would fall below 1.5 times MADS on outstanding bonds. This means that the City can change the income tax base as was the case when  the abolition of the city’s income tax on commuters occurred and when certain items were removed from the sales tax base.

TFA’s original statutory authorization of $7.5 billion has been increased to $13.5 billion (plus $2.5 billion “Recovery Bonds”) for senior and subordinate lien bonds. In 2009, legislation was enacted permitting 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. As of July 31, 2018, the city had $35.8 billion of debt capacity.

The authorizing statute also provided for bondholder protections including the fact that 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).

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PUERTO RICO

The Commonwealth has been in the news primarily as the result of the news that the official death toll attributable to Hurricane Maria has been raised from 64 to 2975. By now the shortfall in the federal response is obvious to all so there is no need to say more here other than to observe that the difficulty in generating real data about the storm and its aftermath are clearly an obstacle to reaching a resolution of the Commonwealth’s effort to restructure its debt.

It is easy to focus on the federal shortcomings but it becomes clearer that the Commonwealth government has much to answer for itself. As the data about the death toll has come out, the emphasis on that data has served to obscure the government’s continuing lack of realism when it comes to the realities of the Commonwealth’s finances. This is clear when one views the debate over whether or not to continue the practice of awarding Christmas bonuses to government workers.

The ongoing debate between the government and the PROMESA fiscal board continues. The debate is fueled by a mixture of pride and political factors which ignore the realities of the current situation. There would not be demands for more and timely operating information which some in the island’s body politic continue to resist. The fact that the Commonwealth has no history of credibility to fall back on in terms of its ability to provide accurate and timely information to its many and varied stakeholders continues to overhang any of the currently ongoing negotiations whether they involve the government and the board or the government and its creditors.

We are not looking for the government of Puerto Rico to turn over all of its sovereign rights but it would be helpful for it to accept the reality that the effort to shift losses onto creditors is only going to work if accompanied by a real effort to upgrade the government’s willingness to significantly improve its performance. Only by establishing a track record of accomplishment can it establish the level of credibility needed to persuade stakeholders to allow Puerto Rico more autonomy.

SOME VOTERS APPROVE TAX HIKES FOR SCHOOLS

Many have wondered if this past Spring’s labor unrest in the education sector would do anything to alter the trend of tighter and tighter revenue constraints which keep school district’s from addressing the wage concerns which generated the unrest. This year’s state budget cycle did produce some improvement in school funding at the state level but the real test comes at the local level when local taxpayers are asked for more revenue.

In at least one case, the recent evidence is positive. On 28 August, voters in Florida’s Broward County School District approved a one-half-mill property tax increase, primarily earmarked for salary increases for teachers. The tax runs through fiscal 2023 (which ends 30 June 2023), after which it will expire if voters do not renew it. The salary increases will sunset when the tax sunsets in 2023, unless voters renew the tax. The vote comes in the wake of a minimal funding increase from the state.

At the end of fiscal 2017, the district had an available operating fund balance of $157 million, equaling a narrow 5.9% of revenue, and an operating cash balance of $491 million, or a moderate 18.5% of revenue. In fiscal 2017, Broward schools received approximately 41% of the district’s $2.66 billion in operating revenue from the state. For fiscal 2019, the district’s basic state aid (through the Florida Education Finance Program) funding increased by just 0.96%, or $18.8 million.

BRIGHTLINE GETS ITS BONDS (AND THEIR SUBSIDY)

Florida’s monument to private enterprise – the tax exempt bond funded Brightline – received another subsidized boost when its was announced that the board of the Florida Development Finance Corp. unanimously signed off on a $1.75 billion bond issue for the Brightline rail service. The tax exempt bond will bankroll its expansion to Orlando.

The announcement comes as data on the service’s operations between Miami and Palm Beach have become available. Brightline’s ridership numbers have fallen far below its own projections. In a bond document in late 2017, Brightline predicted 2018 ridership of 1.1 million and passenger revenue of $23.9 million. During the first three months of 2018, Brightline said it carried just 74,780 passengers who spent $663,667 on tickets.

Brightline management says that ticket sales have been increasing. He said focusing on early ridership numbers before Brightline began serving Miami is “out of context and unfair.” Brightline told bond investors last year that in 2020, it expects to ferry 2.9 million passengers and collect $96 million in fares. Brightline told bond investors last year that in 2020, it expects to ferry 2.9 million passengers and collect $96 million in fares.

The debate over the bonding authorization has highlighted some other facts about this private enterprise. Palm Beach and other counties as well as municipalities along the route are responsible for the maintenance of its grade crossings.

A STREECAR NAMED DE BLASIO

One of the ongoing debates in New York is how and where to find the resources to address the City’s well publicized difficulties experienced with its mass transit system. Owned by the City but funded and operated by a state agency, the system’s problems have been the source of a regular but unproductive debate between Mayor DeBlasio and Governor Cuomo. It has become an issue in the ongoing Democratic primary campaign for Governor.

So it may seem strange that now is the time which the mayor has chosen to announce the revival of his plan for a streetcar system to serve neighborhoods along the Brooklyn-Queens waterfront. The DeBlasio Administration announced that it will move forward with the proposed Brooklyn Queens Connector (BQX) streetcar following the completion of a two-year feasibility study.

Honorable people can disagree over the necessity of the new system and how it will be funded. One thing that all can agree on is that funding for urban mass transit is under attack by the Trump Administration. So it is surprising that the Mayor’s announcement included that it will seek federal funding, among other sources, to deliver the project. The funding sought from the federal government is estimated at $1 billion.

At a time when much more regionally beneficial projects like the Gateway tunnel continues its uphill battle for federal funding, it seems like quite a reach to hope that 37% of the projects cost will be picked up by the federal government.  Nonetheless, that is the plan. How the other portions of the funding needed will be generated is left to the future.

The needs of the existing bus and subway system are pretty clear. Less clear is the need for this project. For instance, at planned service frequencies, ridership modeling indicated significant spare capacity during BQX’s opening years, with peak demand potentially approaching available capacity at scheduled frequency in 2050. In the meantime, the subways are bursting at the seams and the streets are overcrowded by ride sharing cars that limits on their number have recently been enacted. So it seems like a strange time to emphasize this project.

 

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