Monthly Archives: February 2015

Muni Credit News February 26, 2015

Joseph Krist

Municipal Credit Consultant


The U.S. House Judiciary Committee’s subcommittee on regulatory reform, commercial and antitrust law, which has jurisdiction over bankruptcy law, will hold a hearing as we go to press on legislation that would allow Puerto Rico government-owned corporations to restructure their debts under Chapter 9 of the federal Bankruptcy Code. The bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, is sponsored by Democrat Pedro Pierluisi, Puerto Rico’s non-voting representative to the House. Pierluisi introduced the bill last session, but it failed to move.

Puerto Rico is looking for alternatives to restructure its debts after a federal court in Puerto Rico struck down the Puerto Rico Debt Enforcement and Recovery Act on February 9. That law was enacted last year to give the island’s public corporations a process to restructure their debts. Pierluisi did not support that law, and has said repeatedly that Chapter 9 would be a better approach.

Pierluisi said “it is my hope and expectation that the hearing will be productive,” “Many stakeholders support this bill, and this hearing will provide them with the opportunity to memorialize and explain their support.  Although no objections to the bill have been registered with me up until now, if there are any concerns about the legislation, those concerns can be raised and addressed at the hearing.  The point of the hearing is to create a comprehensive record that will help the committee’s leadership determine whether to take the next step in the legislative process, which would be to hold a vote on the bill.”

Investors have concerns about the proposed bill as it could be key for those holding the bonds of financially distressed government corporations on the island. The Puerto Rico Electric Power Authority had to draw on its debt service reserves to make a July 1 interest payment. PREPA, which has more than $8 billion of bonds outstanding, is now in discussions with its creditors, and there had been speculation that it might ultimately use the Recovery Act. The Puerto Rican government has said that it supports amending Chapter 9.


It began with a bang and ends with an effective whimper but the City of Stockton emerged from bankruptcy this week. The well documented fiscal difficulties of the City led to the elimination of OPEB benefits for its retired employees and defaults on a number of lease revenue obligations. But most importantly, the City’s pensioners survived the process with those benefits intact. This creates one more brick in the emerging structure around municipal bankruptcy whereby pension obligations are assuming a superior position to debt obligations in the restructuring of liabilities through Chapter 9.


Since the advent of the automobile as the nation’s primary source of transport , the gasoline tax has provided the financial foundation for the nation’s roads. For each gallon pumped, motorists have paid several additional cents in taxes to their state and federal governments. So long as vehicle ownership grew and driving remained increasingly popular, this model worked. But as vehicles have become more fuel-efficient and younger people are less eager to obtain drivers licenses, gas tax revenue has flattened.

Generally decreased support for tax increases over time has impacted the federal gas tax such that it has lost more than one-third of its value to inflation since it was last raised to 18.4 cents a gallon in 1993. This has altered the debate over long-term transportation funding, especially for highways. As a result, state and federal officials are more willing to look at  alternatives to help pay for repairs and upgrades to highways. Those alternatives are briefly summarized.

In lieu of the traditional model of taxing retail sales of gasoline –  taxing each gallon of gas pumped, some states have begun levying a tax on the wholesale price. Virginia in 2013 repealed its 17.5-cents-a-gallon gas tax and replaced it with a 3.5 percent wholesale tax on gasoline. Minnesota Gov. Mark Dayton has proposed a wholesale tax that would be added to the state’s current per-gallon tax. Because of price swings, wholesale tax revenue can be volatile from year to year. Advocates believe it could provide more revenue growth than a flat, per-gallon tax over the long term.

Some states have begun funding highway projects by taxing all retail sales. Arkansas voters in 2012 approved a half cent sales tax increase with that portion dedicated to highways. The Michigan electorate will decide in May whether to impose a 1-cent sales tax for transportation. Because they are broad-based, retail sales taxes can generate large sums for highways. Opponents most commonly object that sales taxes tend to have a larger proportional effect on lower-income residents. That helped Missouri voters last August to defeat a proposed sales tax increase for transportation.

One new concept is the idea of a tax on the number of miles traveled. It is one of the most commonly discussed alternatives to direct fuel taxes but has not been widely implemented. Oregon plans to test the concept this July with 5,000 volunteers, who will be charged 1.5 cents for each mile they drive while getting a refund on their gas taxes. The vehicle mileage tax also has been studied in California, Minnesota and Nevada. One major obstacle has been privacy concerns from people reluctant to have their vehicles tracked with GPS devices.

Toll roads have existed in some form since the earliest eras in the country’s history and are receiving renewed interest in some places. Delaware raised tolls last year after legislators rejected the governor’s proposed gasoline tax increase. Governors in Connecticut and Missouri also recently referenced the potential for tolls. Opponents cite the relatively high levels of toll which might be required to pay for major projects.  One study found that covering the cost of rebuilding a 200-mile stretch of Interstate 70 in Missouri could mean tolls as high as $30 per car and $90 for heavy trucks.

Public private partnerships continue to be considered and tried although they have had very mixed operating results. In December, Virginia opened a 29-miles stretch of express toll lanes on Interstate 95 outside Washington, D.C. The state funded less than 10 percent of the cost for the $925 million project. Private entities invested their own money, secured a federal loan and made use of tax-exempt bonds. In exchange, Virginia gave them the right to manage the road and collect tolls for the next 73 years. A number of private toll facilities have failed to live up to operating results. The most glaring failure has been the Indiana Toll Road which is in the midst of Chapter 11 proceedings after it failed to achieve projected revenue levels.

One other alternative to increasing existing or establishing new taxes is for states to redirect existing revenue to roads. Idaho last year shifted part of its cigarette tax revenue to highways. Texas voters in November approved the transfer of a portion of oil and gas severance taxes from the state’s rainy day fund to roads. Some states have increased vehicle registration fees. Washington has imposed fees on owners of electric vehicles, and Gov. Jay Inslee recently proposed a carbon-emissions tax on the state’s largest polluters that would help finance transportation projects. He describes it as “transportation pollution paying for transportation solutions.”

The area of most uncertainty has been the issue of the establishment of a consistent funding plan for the federal Highway Trust fund. After years of relative consensus on the issue and regular approval of five year funding programs, the issue has become caught up in annual political wrangles.  Currently, various proposals from President Barack Obama and U.S. Senate and House members would help finance the federal Highway Trust Fund with taxes on the foreign-earned profits of U.S. corporations. Some proposals also would create a $50 billion infrastructure fund, to be financed by selling bonds to private companies or by taxes on foreign profits. Such a fund could be used to make equity investments and loans for state and local infrastructure projects.


New Jersey Superior Court Judge Mary Jacobson ruled Monday that the state’s failure to make a full pension payment is “substantial impairment” of the contractual rights of the police, firefighters, teachers and office workers who sued. “Because the state will now make nearly 70 percent less than the statutorily required $2.25 billion payment,” the expectations of workers have been “substantially impaired,” the judge ruled. “In short, the aim of the legislation is not being met.”

The decision is a change in course from last year for the same judge. Jacobson’s ruling contrasts with her decision days before the last fiscal year ended June 30, when Christie said he faced a fiscal emergency. Workers sued then as well, and the judge said Christie acted reasonably in paying $696 million to the pension system to cover current employees while deferring $887 million to help close the gap left by previous governors.


Jacobson’s ruling contrasts with her decision days before the last fiscal year ended June 30, when Christie said he faced a fiscal emergency. Workers sued then as well, and the judge said Christie acted reasonably in paying $696 million to the pension system to cover current employees while deferring $887 million to help close the gap left by previous governors.  The legislative and executive branches “have now had almost 10 months to find a solution to the pensions crisis for FY 2015,” Jacobson said in the latest ruling.  “Time is of the essence for the legislative and executive branches to work together to come up with a solution to the pension crisis,” Jacobson said, adding that there’s no evidence of “any serious efforts to find a solution since the revenue shortfall accrued.”

A  spokesman for the Governor blamed “liberal judicial activism” for the decision. Democrats faulted Christie for refusing to adopt their proposed balanced budget that fully funded the state’s pension obligation. “This ruling is the predictable and unfortunate result of the governor’s fiscally irresponsible decision,” Assembly Speaker Vincent Prieto, Majority Leader Lou Greenwald and Budget Chairman Gary Schaer said in a statement.

In his FY 2016 budget presentation, Mr. Christie called for a freeze of the existing state-run pension system and proposed that public workers be shifted into a different type of retirement plan, one that would not force state taxpayers to make what the Governor deems to be open-ended contributions. Both the existing plan and the new follow-on plan would be placed within a new legal entity – a trust –  over which public worker unions would have oversight. The freeze would not eliminate the underfunding in the existing pension system. Mr. Christie called for paying it down over 40 years proposing a constitutional amendment making the payments necessary to do so mandatory.

One major problem emerged immediately. Mr. Christie declared in the address that he had an agreement with the state’s largest teachers’ union to solve the pension problem, but the union countered that it had agreed only to a framework, and to keep talking. He offered no details as to how he would meet the obligations the judge said had to be made — to pay the full pension payments that were due this year under the legislation he signed in 2011. The governor fell short of that amount by about $1.57 billion. For next year, the governor proposed making another partial payment — $1.3 billion instead of the $2.9 billion called for in the 2011 legislation.

Another Christie proposal would require local government, including school districts, to finance their employees’ pensions, rather than leaving the state to do so as it currently does. It is unclear where that money would come from, as state law caps property tax increases at 2 percent and the Governor did not specify how localities were to develop the funding necessary to cover the new expense.

The governor’s proposal was although noteworthy in that it excluded any proposal for new or increased taxes as a potential source of revenue to finance pension and health benefit costs associated with the need to make up the State’s long existing pension shortfall. It does include a $1.3 billion payment for pensions but this appears to be below the required level of funding required by legislation enacted in 2011. There was no mention of the State’s Transportation Trust Fund difficulties. Should the proposals be adopted intact – something we see as unlikely – there would appear to be little prospect of relief on the horizon for the State’s beleaguered bond ratings based on this presentation. All in all a negative day for New Jersey bond holders.


Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News February 19, 2015

Joseph Krist

Municipal Credit Consultant


Just after we went to press last week, S&P announced a downgrade of Puerto Rico’s  general obligation (GO) bonds and Puerto Rico Tax Financing Corp. (Cofina) bonds to B. Also downgraded was debt of the Puerto Rico Municipal Finance Agency, the Puerto Rico Employees Retirement System’s, the Puerto Rico Infrastructure Financing Authority’s (rum tax) and the Puerto Rico Convention Center District Authority. The outlook on all ratings is negative.

In particularly strong language S&P warned that “Puerto Rico’s focus more recently has turned to new rounds of financing to simply maintain critical levels of operating cash, while paying a high price for new financing. All of this poses a threat, in our view, to the commonwealth’s ability to continue providing basic governmental services. We have observed in other jurisdictions that such an environment can easily give way to political and policy instability,” the report stated. “The government’s response to the situation has vacillated between rounds of spending austerity and tax cuts, or increased taxes and limited layoffs, but in either case it has relied on debt issuance to cover operating deficits.,”

PR does not like to see its situation compared to that of sovereign debtors like Greece. It’s responses to events like this however are not helpful. As has often been the case, government spokespersons used somewhat emotional language to respond. “The continued push by this firm to provoke abrupt measures like the mass firing of public employees is not in line with the public policy of this administration,” said a government public affairs official. “We will continue taking necessary measures to straighten out public finances in a responsible way without firing employees. Government Development Bank for Puerto Rico (GDB) President Melba Acosta said “While we are disappointed with Standard & Poor’s decision, we remain committed to the implementation of our fiscal and economic development plans, and to addressing both near- and long-term challenges.”

The market continues to look for tangible evidence that the government not only has a plan but also is in a position to implement it. The concerns about its ability to successfully implement a value added tax and for the tax to achieve the projected collection levels are real. A well executed implementation would do more for the credit than the continued rhetoric of an aggrieved party.

The need for economic improvement was highlighted when it was announced that Puerto Rico government revenue missed estimates again in January by $18.8 million, increasing the revenue shortfall so far during fiscal year 2015 to $115.2 million. $699.5 million was collected in January, up $20 million from the previous year, but the $4.455 billion in net revenue through the first seven months of the fiscal year is still $183 million below what was collected during the same period last year. Corporate revenue of $54.1 million was $36.1 million below estimates and $39..8 million below last January, sales & use tax (IVU by its Spanish acronym) revenue of $91.4 million missed targets by $55.1 million and below the previous January by $500,000, and Act 154 revenue of $81.9 million was $54.1 million below revenue and $59.7 million off last January.

Individual income taxes rose by $47 million and nonresident withholdings were up by $109 million. An additional $62 million in revenue was collected in January as a result of the enactment of Act 238 of 2014, which extended the due date to make pre-payments at preferential rates on certain transactions, such as Individual Retirement Accounts (IRAs), retirement plans and other capital assets. Following the enactment of this law, taxpayers who were previously unable to make these pre-payments were able to take advantage of the law during the month of January.

Excise tax collection changes versus last year showed alcoholic beverage revenue was up by $8 million, tobacco products were down by $11 million and motor vehicles by $10 million. The Treasury secretary said he is preparing a new revenue estimate for the remainder of the fiscal year based on year-to-date collections and prevailing economic conditions. In order to close the $115 million gap, the secretary announced that as a preamble to the tax system overhaul, a bill (H.R. 2316) was introduced allowing the pre-payment of a special tax on certain transactions including taxes on corporate dividends for future distributions of accrued benefits and profits. It also allows for prepayments to  IRAs and Educational Contribution Accounts until March 31.


It hasn’t taken long for the Illinois fiscal drama to develop. Just days after it was issued the state comptroller, Leslie Munger, said Friday she would not follow an executive order by Gov. Bruce Rauner to hold up so-called fair-share union dues from nonunion workers. Ms. Munger, a Republican as is the Governor, said she would follow the guidance of Attorney General Lisa Madigan, a Democrat, who said that the fees are part of union contracts and that executive orders do not apply to offices outside the governor’s. Mr. Rauner, who appointed Ms. Munger, issued the decree on Monday explaining that it was unfair for 6,500 nonunion workers to pay dues to unions that engage in political activities — although the law already prohibits using fair-share dues on politics. He ordered the money taken from their paychecks to be held in escrow until a federal lawsuit he filed this week is settled. Union leaders contend that the fees are reasonable contributions from workers who, while choosing not to be union members, still benefit from collective bargaining agreements.

It was in front of this backdrop that the Governor made his budget proposal for FY 2016. In regards to pensions, the State currently offers two levels of pension benefits – one plan for those first hired before 2011 and another, more affordable plan for more recent hires. The Governor proposes legislation to put in a “freeze” on the level of benefits that employees hired before 2011 have earned as of July 1, 2015. For work after July 1, 2015, these employees’ newly earned benefits will be based on the plan that now applies to employees and officials first hired or elected after 2010. The key change in newly earned benefits will be moving to a lower cost-of-living adjustment (COLA). COLAs on benefits earned before July 1, 2015 would continue to be paid in retirement at 3 percent a year compounded. COLAs on newly earned benefits would be the lesser of 3 percent or half of inflation, non-compounding, and would begin later. The governor’s proposed reforms are projected  by him to reduce the state’s general-funds payments in the next budget year by $2.2 billion.

The Governor proposes to reduce the projected FY 2016 budget gap through employee benefit reform ($2.9B), reduced subsidies to other governments ($1.3B), medical provider rate reductions ($1.2B), reduced services ($0.8B), “operational efficiencies” ($0.2B), earmark eliminations ($0.1B), and moving citizens to health exchanges ($0.1B).  Tax increases not part of the formula. The proposals will be controversial. They include significant service reductions in Medicaid and payments to hospitals. Proposed employee benefit reductions  require legislation and survival of legal challenges in order to implement them.

We expect that the plan will run into significant political opposition from the full spectrum of interest groups both individual and governmental. We believe that it is unrealistic to expect that all of the proposed savings will be achieved and that the decline in the state’s relative creditworthiness will continue.


Medicaid is front and center in many budget debates across the country.  In Pennsylvania new Gov. Tom Wolf said that he would pursue a straightforward expansion of the Commonwealth’s Medicaid program for the poor, no longer charging premiums or limiting benefits for some enrollees. In Tennessee and Wyoming  bills to extend Medicaid to far more low-income residents under the law were defeated by Republican legislators, despite having the support of the states’ Republican governors. Expansion opponents do not believe the federal government would keep its promise of paying at least 90 percent of the cost of expanding the program. It currently pays the full cost, but the law reduces the federal share to 90 percent — a permanent obligation, it says — by 2020.

In Utah, Gov. Gary R. Herbert has negotiated a tentative deal with the Obama administration for an alternative Medicaid expansion but it is meeting with resistance in the state’s Republican-controlled Legislature. So far, 28 states have taken advantage of the federal funds offered through the health care law to sharply increase the number of adults eligible for Medicaid. Ten had Republican governors when they decided to expand the program, and supporters of the law hoped that the most recent, Indiana, would influence other holdouts to follow. Indiana’s governor, Mike Pence, is one of the most conservative yet he decided that accepting the federal Medicaid expansion funds — albeit with concessions from the Obama administration, like requiring many beneficiaries to pay something toward their coverage or be locked out of it for six months — was good policy.

Just after Indiana’s move, a similar plan from Gov. Bill Haslam of Tennessee went down to swift defeat by the vote of a State Senate committee. The Governor had called a special session for the Legislature to consider his plan, which he had spent months working out with the Obama administration. He had traveled the state to promote it — and persuade people that it was not part and parcel of the Affordable Care Act, partly because the Tennessee Hospital Association had agreed to pay any expansion costs beyond what the federal government covered.

In Florida, business leaders and hospital executives are pressuring conservative legislative leaders to consider alternative expansion plans in the session that starts next month. In Alaska, the new governor, Bill Walker, an independent, will try to convince state lawmakers to agree to expand Medicaid by the start of the new fiscal year on July 1. In Idaho, an alternative Medicaid expansion plan, put forth by a task force appointed by Gov. C. L. Otter may go before the Legislature in the next few months.


In November, shortly after Gov. Sam Brownback won re-election, some observers forecast that the state would bring in $1 billion less than expected over the next two years. His response was to cut state agency budgets and propose transferring of funds among various state accounts including moving funds intended for the state highway system to the general fund. In December came news of lower than expected revenue, some $15.1 million below estimates. Mr. Brownback proposed increasing taxes on liquor and cigarettes, slowed reductions in the income tax and changed the way money was distributed to public schools.

Revenue continues to disappoint: January receipts fell $47.2 million short of predictions, and Mr. Brownback has responded by cutting funding for public schools and higher education by a combined $44.5 million. The move has upset education officials across the state.  In one example, the Kansas City Public School District has received $45 million less in state revenue since 2009. A cut of 1.5 percent to public school funding statewide would amount to a loss of $1.3 million according to the District. The state has not paid the district $3 million for capital expenses required under a formula intended to help poor districts. Mr. Brownback has asked legislators to change that formula. The cuts come amidst a larger budget picture in which the governor has been forced to fill a $344 million budget gap for the fiscal year ending in June; a shortfall of nearly $600 million has been forecast for the fiscal year starting July 1. Many blame the state’s budget situation on the income tax cuts that the governor has ushered into law in recent years.

The governor has asked lawmakers to rewrite the formula used to provide aid to the neediest school districts. If the Legislature saves money by doing so, the governor says that it could restore the $28 million in cuts to K-12 public schools that he called for this month. The governor has also requested that lawmakers overhaul the means for financing schools in general. In the meantime, the state courts are addressing a lawsuit brought by a group of school districts and parents which asserts that the state has violated the Constitution by not providing adequate funding for education. In December, a state district court handed down a decision which said that Kansas schools were not adequately financed. That  decision was appealed before the state Supreme Court. If the court orders the state to increase spending, it could conflict with the cuts that the governor has ordered.


The first round of post-bankruptcy water rate changes for area municipal providers of water have been proposed. The Detroit Water Department is changing its billing practices to shift more of the cost of service to the fixed monthly fee. The new system will rely less on payments based on water use, which is subject to considerable variance. The wholesale rate increase will average 11.3% while Detroiters will pay about 3.4% more under the proposal. The potential for much larger increases for out of City customers was one of the factors that complicated negotiations over the proposed creation of a new regional water entity to finance the water system’s extensive maintenance-related capital needs going forward. According to data provided by the Detroit Free Press, most communities will see decreases in the cost of 1000 cubic feet of water but some will see increases of up to 14%.


Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.


Muni Credit News February 12, 2015

Joseph Krist

Municipal Credit Consultant


Investors in billions of dollars of Puerto Rico bonds scored an initial major legal victory when a federal judge ruled that the commonwealth’s recently enacted debt-restructuring law was unconstitutional. Judge Francisco A. Besosa of the United States District Court in Puerto Rico said on Friday that the Puerto Rico Public Corporations Debt Enforcement and Recovery Act was void and enjoined commonwealth officials from enforcing it.

The act as passed enables the commonwealth to restructure its debts (other than Commonwealth G.O. bonds) and labor contracts of the island’s public corporations, including the Puerto Rico Electric Power Authority (PREPA). Puerto Rico cannot seek protection from creditors under federal bankruptcy law, so it has fewer options to restructure the finances of its troubled agencies.  A group of PREPA bond holders, including BlueMountain Capital and OppenheimerFunds, that own about $2 billion of the power’s authority’s debt sued the commonwealth in federal court, arguing that the recovery act violated their contractual rights.

The passage of the recovery act in June disappointed investors, particularly hedge funds, which had been active buyers of bonds issued by PREPA and other Puerto Rico entities at distressed prices. Investors perceived that the new law showed how the government of Puerto Rico was unwilling to pay, a keystone of municipal finance. Enactment led to a series of downgrades by Moody’s, which had already rated the commonwealth’s debt as junk.

The decision said that the legislation was pre-empted by federal bankruptcy law. “The commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the recovery act,” according to the 75-page decision. A spokesman for the Government Development Bank said: “We will be reviewing all the aspects of the ruling rendered by Judge Francisco Besosa. In due time and after careful examination, we will decide on a course of action.” The ruling is a significant setback for the Puerto Rico government, as it tries to restructure the debts of its public corporations while still maintaining the confidence of the municipal bond market. Due time was not much time as  the government announced that it will seek to appeal the ruling.

We see the situation less positively. The reality is that Puerto Rico still needs to restructure its debt in the face of a persistently underperforming economy. Any celebration would be clearly premature.



Newly elected Gov. Bruce Rauner took his first step toward curbing the power of public sector unions this week by issuing an executive order that would bar unions from requiring all state workers to pay the equivalent of dues. Mr. Rauner said. “An employee who is forced to pay unfair share dues is being forced to fund political activity with which they disagree. That is a clear violation of First Amendment rights — and something that, as governor, I am duty bound to correct.”

The action follows that of other Republican governors in the Midwest who have aggressively taken on public sector unions in recent years. It started with Mitch Daniels of Indiana, who ended collective bargaining by state workers by executive order; Scott Walker of Wisconsin, led efforts to cut collective bargaining rights for most public employees; and Rick Snyder of Michigan, signed legislation ending the requirement that all workers in unionized workplaces pay union dues.

The  executive order affects about 6,500 of the state employees who are not in unions but currently pay fees in lieu of union dues. The American Federation of State, County and Municipal Employees said that about 42,000 state employees are represented by unions. Union leaders have described the fees, often called “fair share” payments, as reasonable contributions from workers who, while choosing not to be union members, still benefit from collective bargaining agreements.

The order does not affect private sector unions or state employees who choose to be in unions. A spokesman for the governor said that the executive order would take effect immediately but that the money from the union fees would be placed in escrow in case the order was challenged in the courts. In his recent State of the State address, Mr. Rauner called for a ban on political contributions by public employee unions to “the public officials they are lobbying, and sitting across the bargaining table” from, as well as allow local governments to enact “right to work” laws. Those laws typically abolish the practice of making both union membership and dues-paying automatic in unionized workplaces leading to declines in union ranks.

AFSCME, which is set to negotiate a contract with the state this year, is one of many unions that backed Mr. Rauner’s Democratic opponent in last year’s election. A spokesman for the National Right to Work Committee, said the action could be seen as a natural progression from recent victories in nearby states. “There will inevitably be a union battle on this,” he said, “but we’re excited this is bringing this issue to the forefront.”  “We’d like to see Illinois become a right-to-work state,” he said. “Obviously, you need more than just the governor to get that done.”

The move has some aspects of kabuki theatre to it in that it follows a pattern of regional governors taking the executive order route rather than offer a legislative proposal. In Illinois, the state’s legislature is controlled by Democrats, many of whom have received union support over the years. On Monday evening, the reaction from legislative leaders was strategically muted.

“Our legal staff is reviewing the governor’s executive order regarding fair share,” said the Senate president, John Cullerton, a Democrat. “At the same time, I look forward to hearing the governor’s budget as we search for common ground to address our fiscal challenges.” Bob Bruno, director of the labor education program at the University of Illinois at Urbana-Champaign, said “in principle, it’s a pretty serious assault. In terms of impact, it remains to be seen because it’s a relatively small percentage of the population that’s chosen fair share,” Mr. Bruno said. “This is an assault on the institutional existence of the union in the public sector, and these sorts of fights are historic fights and have big impact.”


Municipal investors continue to chew over the implications of the Detroit bankruptcy. The result there and its negative impact on debt holders versus other creditors has led to concern that Michigan issuers may consider similar moves to be available tools to deal with other entities in financial trouble. Hence, the importance of comments made by Wayne County Executive Warren Evans last week about a financial mess that could see the county’s general fund revenue depleted as early as May 2016.

A financial review from auditing firm Ernst & Young, along with research from a group put together during Evans’ transition into office, developed a forecast of general fund results going forward. The county currently has a $70-million deficit, and pension funds are funded at 45%, down from 95% just 10 years ago. “We understand the fiscal illness,” Evans said. “We’re working to make sure the illness isn’t terminal.”  He was quick to dismiss concerns on whether state oversight — or a potential bankruptcy – were looming. He characterized the problem as one which was solvable in-house. He implied that this would lessen the likelihood of outside oversight.

Evans said solutions have not been devised at this point as his administration has been working to find out “exactly how deep the hole was.” “Everything is on the table,” he said about the potential for cuts. “We’re working on solutions. And those need to be worked on by the stakeholders.” The county’s director for budget and planning attributed most of the shortfall to the economic downturn beginning around 2008, when the county began facing massive losses from property tax revenues. In the meantime, the county’s responsibility for legacy costs — employee healthcare and pension contributions — increased about $50 million annually.

According to the former county executive Robert Ficano, losses from property-tax revenue due to the economic downturn had left the county with more than $200 million in debt, unable to keep up with employee pension liabilities and increasing health care costs. For the 2012-13 fiscal year, with a budget of $2.34 billion, the county reported a deficit of about $30 million. The 2014-15 budget is for $1.68 billion.

In response to the comments, Moody’s downgraded to Ba3 from Baa3 the rating on the general obligation limited tax (GOLT) debt of the County. The county has a total of $695 million of long-term GOLT debt outstanding. Moody’s adjusted the outlook to negative to reflect its expectation that the county faces hurdles in implementing significant cost reductions. Failure to reach structural balance in the near term is seen as degrading available liquidity and could raise the probability of state intervention and increase the risk of the county seeking to restructure its debt and other obligations.


Colorado released data on tax revenue collections from recreational marijuana in the first year of sales, and they were below estimates — about $44 million. The release of December sales tax data was for its first full calendar year of the taxes from recreational pot sales, which began Jan. 1, 2014. Colorado was the first government anywhere in the world to regulate marijuana production and sale, so the data was widely anticipated. In Washington, where legal pot sales began in July, the state had received about $16.4 million in marijuana excise taxes by the end of the year; through November, it brought in an additional $6.3 million in state and local sales and business taxes.

Colorado’s total receipts related to marijuana for 2014 was about $76 million. That includes fees on the industry, plus pre-existing sales taxes on medical marijuana products. The $44 million represents only new taxes on recreational pot and  were initially forecast to bring in about $70 million. By all accounts, that estimate was a guess. Colorado has already adjusted downward spending of the taxes, on everything from substance-abuse treatment to additional training for police officers.

Colorado will also likely have to return to voters to ask to keep the pot tax money due to a 1992 amendment to the state constitution that restricts government spending. The amendment requires new voter-approved taxes, such as the pot taxes, to be refunded if overall state tax collections rise faster than permitted. Lawmakers from both parties are expected to vote this spring on a proposed ballot measure asking Coloradans to let the state keep pot taxes.

The results underscore a big conflict facing public officials considering marijuana legalization. Taxes should be kept low if the goal is to eliminate pot’s black market. But the allure of a potential weed windfall is a powerful argument for voters, most of whom don’t use pot. So far, the Colorado experiment shows the tax revenue isn’t trivial but it has also shown that pot-smokers don’t necessarily want to leave the tax-free black market and pay taxes. If medical pot is untaxed, or if pot can be grown at home and given away as in Colorado, the black market persists.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News February 5, 2015

Joseph Krist

Municipal Credit Consultant


The $4 trillion fiscal 2016 budget request unveiled by President Obama on Monday includes several proposals for the municipal market to chew over. They include: a six-year, $478 billion transportation infrastructure plan; the creation of tax-exempt qualified public infrastructure bonds; America Fast Forward direct-pay bonds; and an increase in the annual issuer bond limit for bank-qualified bonds.

On the negative side, the idea to limit the value tax-exempt bond interest to 28% of a taxpayer’s income was again included. A new proposal to eliminate the use of tax-exempt bonds to help finance professional sports stadiums was also included.  As expected, the budget proposes the creation of tax-exempt QPIBs, which would not be subject to volume caps or the alternative minimum tax. They would however, have to comply with other private-activity bonds requirements, such as having to obtain public approval.

QPIBs could be issued beginning in 2016 for airports, docks and wharves, mass commuting facilities, water furnishing and sewage facilities, solid waste disposal projects, and qualified highway or surface freight transfer facilities. Projects financed by QPIBs would have to be owned by a state or local governmental unit and would have to serve a public use or be available on a regular basis for general public use. QPIBs could replace certain PAB categories or could be issued in addition to them. The revenue loss associated with the new bonds would increase the deficit by $4.83 billion from 2016 through 2025, according to the budget.

As anticipated, the budget would increase the issuer annual cap to $30 million from $10 million for bank-qualified bonds. Banks could buy the tax-exempt bonds of issuers who reasonably expected to issue less than $30 million of munis during the year. Also proposed was a change to the 2% de minimis rule for financial institutions to include banks. That provision would allow banks to deduct 80% of the cost of buying and carrying tax-exempt bonds, to the extent that their tax-exempt holdings do not exceed 2% of their assets. Banks currently are only able to take advantage of that 80% write-off when purchasing bank-qualified bonds.

The president proposed expanding a little-known program called Qualified Public Education Facility Bonds. First authorized in 2001, issuance is currently capped at the greater of $5 million or $10.00 per capita. The program has not been used much, if at all, because of its problematic requirement that an educational facility be both part of a public elementary or secondary school and owned by a private, for-profit corporation engaged in a public-private partnership with a state or local government. The proposal would eliminate the private corporation ownership requirement and subject QPEFs to state PAB volume caps. Once more the administration renewed its idea for a 28% cap on the value of tax-exempt bond interest, including for bonds already issued, beginning in 2016. Dealer groups complain this would be a tax on municipals.

Obama’s proposed fee of seven basis points for banks, broker-dealers and other financial institutions with worldwide assets of more than $50 billion was also criticized.

The budget once again calls for the creation of a permanent, taxable direct-pay America Fast Forward bond program, with Treasury making subsidy payments to issuers equal to 28% of their interest costs. AFF bonds could be used to finance projects that could be financed with PABs or QPIBs as well as governmental capital projects or current refundings of bonds associated with such projects. They could also be used for working capital financings and projects for 501(c)(3) nonprofit entities.


The President’s budget proposal for FY 16 included provisions that would cause manufacturers based in the states to no longer be able to avoid Federal taxation of income through U.S. territories and foreign countries. Currently, companies can avoid the taxation by establishing subsidiaries in territories and other nations. The 35% corporate income tax is not due unless the parent company receives the earnings from the subsidiary.

Under the provision known as repatriation, the President calls for  taxing the income at a 19% rate. Also proposed  is a one-time rate of 14% for earnings that have been kept out of the United States for past years through the first year of the new taxation. The President, additionally, also proposed lowering the rate on corporate income from the States to 28%. The 19% rate would be reduced for taxes paid locally and investments in operations such as manufacturing facilities.

The tax avoidance strategy is used by most of the companies based in the States that have manufacturing operations in Puerto Rico. Puerto Rico could theoretically be the beneficiary of most of the 19% rate under the Obama proposal but the commonwealth government has entered into contracts with manufacturing operations that lower its taxation of their income to a few percent at most. Because the contracts prevent the Commonwealth from increasing the tax, it has also imposed a four percent excise tax on parent company purchases of the products of their subsidiaries. The combined taxation, however, is still far short of the 19%.

The tax proposal was the only real change in the direct federal impact on Puerto Rico in the Obama budget. An annual list of State, territory, and freely associated state shares of selected programs estimated that Puerto Rico would receive $4.02 billion in Federal Fiscal Year 2016 vs. $3.93 billion this fiscal year. The increase is smaller than the increase for all jurisdictions but in line with the Commonwealth government’s usual share. That share for Federal Fiscal Year 2016 is .71% of the programs. The share is small compared with what it would be if Puerto Rico were a State and treated equally with the other States in all programs. The territory about 1.1% of the nation’s population.


In his Executive Budget for the FY 2016-FY 2017 biennium, Governor Kasich recommends GRF appropriations of $35.3 billion in FY 2016 (a 12.5% increase over estimated FY 2015 spending) and $37.0 billion in FY 2017 (a 4.8% increase over FY 2016). The Governor’s recommendations for all funds total $68.5 billion in FY 2016 (a 2.0% increase over estimated FY 2015 spending) and $70.2 billion in FY 2017 (a 2.5% increase over FY 2016). Medicaid is the single-largest program in the state budget, with recommended GRF appropriations in FY 2016 of $18.5 billion (21.4% above FY 2015 estimated spending levels) and $19.6 billion in FY 2017 (6.2% above FY 2016 spending levels). These appropriations include the federal share of the program, which makes up approximately 68% of the total. State share appropriations total $6.0 billion in FY 2016 (4.4% above FY 2015 estimate) and $6.3 billion in FY 2017 (6.1% above FY 2016).

The centerpiece of the budget plan is tax reform. The Governor’s tax reform proposal, would reduce state revenues by $367 million in FY 2016 and $443 million in FY 2017. The proposal would cut all marginal income tax rates by 23% and create a new small business deduction. To help pay for these significant cuts, offsetting revenues would be generated by increasing the state sales tax rate from 5.75% to 6.25%, subjecting a subset of services to the sales tax, reducing the motor vehicle trade-in allowance, increasing the commercial activity tax (CAT) rate, and increasing tax rates on cigarettes and other tobacco products (OTP). Also, a small set of income tax deductions and credits would be eliminated for taxpayers with incomes in excess of $100,000. Finally, the Administration is proposing a severance tax on oil, natural gas, and other hydrocarbons extracted from shale wells at tax rates from 4.5% to 6.5%.

Of interest to tobacco securitization bond holders is the Administration proposal to raise the cigarette tax rate by $1.00 per pack to $2.25 per pack. Research shows that increasing cigarette tax rates can accomplish the twin goals of raising revenue and reducing cigarette consumption. The reform proposal also increases the tax rate on the wholesale value of OTP (such as cigars, snuff, etc.) from 17% to 60%, to equalize the OTP tax rate with the estimated average cigarette tax burden as a percent of price. Finally, the proposal would introduce a new “vapor products tax” on so-called e-cigarettes, also at 60% of value. These changes are estimated to increase revenues by $528 million in FY 2016 and $463 million in FY 2017.


December’s rains enabled Californians to finally meet Gov. Jerry Brown’s call for a 20 percent reduction in monthly water consumption, but more restrictions loom as the state adapts to a drought. A survey released Tuesday that showed an unusually rainy month helped residents cut water use by 22 percent statewide from December 2013 levels. This welcome news was offset by the fact that the Sierra Nevada snowpack, which supplies a third of California’s water, is 75 percent below its historical average. Regular readers will recall a photo we published of San Francisco’s Hetch Hetchy Reservoir and its lower water levels. For the first time in recorded history, there was no measurable rainfall in downtown San Francisco in January, when winter rains usually come. The governor called on Californians to use 20 percent less water last year when he declared a drought emergency. The closest they previously came to reaching that goal was in August, when water use dropped 11.6 percent. The state has authorized cities to fine people $500 a day for violating restrictions on lawn watering and washing cars.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.