Monthly Archives: March 2015

Muni Credit News March 26, 2015

Joseph Krist

Municipal Credit Consultant


Whenever a difficult political issue comes up, it’s often described as being a political “third rail”.  The national moves toward the reform of pension funding have had a common “third rail”  feature as they take shape. That feature is that the various proposals to address pensions nearly universally exempt police and firefighters from adjustments to their pension benefits. The difficulty in addressing some of the thorniest pension issues is summed up in recent comments by Gov. Bruce Rauner of Illinois. He has been promoting a plan for more than $2 billion in cuts to pensions for public employees, except police officers and firefighters. “Those who put their lives on the line in service to our state deserve to be treated differently,” Mr. Rauner said in his February budget address to the state legislature.

Similar positions have been voiced by governors in adjacent states as they address pension and other labor issues. In 2011, Gov. Scott Walker of Wisconsin signed a law that limited collective bargaining rights for government workers and required them to contribute more toward their own pensions and health coverage. The legislation, known as Act 10 excluded police officers and firefighters from its provisions. In 2012, Gov. Rick Snyder of Michigan signed a right-to-work bill, eliminating the requirement that private and public sector workers contribute dues to the unions that represent them, whether or not they are members. The bill included a “carve-out” for police officers and firefighters.

Politically, the carve outs make sense. These services are provided by members who have strong political support. Who would politically risk denying the unique risks of police officers and firefighters? Take the politics out of the issue and rely on analytics to support the basis for such exemptions – the dangerous nature of the work – the exemption is not necessarily statistically supported. They are not the only public employees whose work is dangerous. Statistically, at least, there are far more dangerous public sector jobs. According to the Bureau of Labor Statistics, on-the-job fatalities occur at a significantly higher rate for “refuse and recyclable material collectors” — sanitation workers — than for police officers. The same is true for power line installers and truck drivers. And fatality rates for these workers exceed those for firefighters by a considerable margin, though firefighters have serious health complications like cancer at relatively high rates in retirement.

Even with the public’s view of the special nature of police and fire work,there may be a more economic way to reflect that view than through pensions. Police officers and firefighters can retire with full pensions at younger ages than other state employees (beginning at age 50 in Illinois, often younger in other states). That means they frequently spend many more years drawing their pension benefits, even while being permitted to maintain full-time salaries in the private sector. This drives up long-term costs for municipalities and states. There is also an argument to be made that early retirement policies also deplete police and fire departments of the valuable experience of critical employees when their experience is most valuable.

In Wisconsin, Gov. Walker argued that it was important to exempt police officers and firefighters because the state relies on them during emergencies and cannot afford unrest in their ranks. In Michigan, Mr. Snyder worried that extending right-to-work provisions to police officers and firefighters would hurt their cohesion. For other workers, the argument in favor of right to work was based on freedom of association and more supervisory flexibility.

One would think that if policing and firefighting are the most critical services local governments provide, the public would be more likely to support improvement and modernization of operating practices. For example, municipalities could improve the productivity of their fire departments by reforming the traditional schedule of 24 hours on, followed by one or more days off. But the only way to change that is through bargaining, and the concept has been resisted  by police and fire unions.

Some backers of right-to-work laws and curbs on collective bargaining for public employees say they should be applied without exception. This however works better in theory than in practice. One governor who did not exempt public safety employees from limits on their bargaining rights was Gov. John Kasich of Ohio. His proposals were rejected by voters in a referendum within eight months.

As for Illinois, while it waits for its pension changes to work their way through the courts, Gov. Rauner has instructed state agencies to divert money from nonunion employee paychecks away from organized labor until a judge settles the matter. A memorandum obtained by The Associated Press, shows his general counsel, Jason Barclay, directing departments under the governor’s control to create two sets of books: one with the “proper pay” and one, to be processed, that reduces the worker’s gross pay by an amount equal to what is normally paid in the fees. Mr. Rauner’s action could keep about $3.74 million out of union bank accounts. Of course, two sets of books is something that municipal analysts love and always is reflective of financial dysfunction.


The Government of Puerto Rico said last week that it refinanced $246 million in outstanding bond anticipation notes (BANs) at a rate of 8.25%. Principal sinking fund payments begin July 1, 2015. The notes are secured by a pledge of $6.25 of the new tax on non-diesel petroleum products and are guaranteed by the full faith and credit of the Commonwealth of Puerto Rico. Through the transaction, the holders of the Highways and Transportation Authority (HTA) BANs released all liens on pledged HTA revenues.

The notes issued by the Infrastructure Financing Authority (PRIFA) were bought by RBC Capital Markets as a part of the plan to increase the liquidity of the Government Development Bank (GDB) and support the finances of the HTA, one of PR’s several heavily indebted public corporations. The new notes redeem and retire a previous BAN issued for the HTA that matures Sept. 1, 2015.

The BANs are ultimately expected to be refinanced prior to maturity with the proceeds of a long-term PRIFA bond issuance. The deal was expedited by Act 29 of 2015, quietly enacted into law by Gov. Alejandro García Padilla. The legislation makes technical amendments to the law authorizing an increase in the petroleum-products tax to back the $2.95 billion bond deal, which is expected to occur by early May. The new law raises the excise tax on a barrel of crude oil from $9.25 to $15.50. It includes an adjustment factor that calls for the tax to be increased in the future if revenue isn’t sufficient to repay the bonds. The first adjustment, if required, would take effect July 1, 2017, according to the bill.

Moody’s has estimated that the GDB’s liquidity could fall as much as 22% if there was no new bond offering to refinance the HTA’s debt. Moody’s also has projected that the Electric Power Authority (PREPA) will likely default by July 1, when it is scheduled to make an estimated $400 million debt service payment.

The GDB has also said that it expects to hold an investor teleconference by early April to discuss more details of the deal, as well as provide updated information on government revenue and the outlook for the proposed fiscal year 2016 budget, which will be presented in the coming weeks. Some estimates are that the bond issue could need to be sold at a yield of up to 10.5% for investors. The issue, however, has an average interest-rate cap of 8.5%. Without insurance, Puerto Rico would have to offer a discount of 88 on the issue to obtain that yield. That is estimated  to net Puerto Rico $2.5 billion if the full $2.95 billion issue were sold.

Hedge-fund investors, expected to be the prime buyers of the bonds, have been making suggestions to improve operations and accountability. One proposal is for legislation that would empower the GDB to name emergency managers for up to two years for financially troubled public corporations, government agencies and municipal governments. The emergency-manager proposal being discussed would only require the consent of the governor to name an emergency manager, without having to get Puerto Rico Senate or other legislative approval. The emergency manager would have broad powers to act independently to fix the finances at the particular entity.


In spite of rates of decline in cigarette consumption which seem to be outpacing estimates, tobacco bonds may be on their way to the biggest volume since 2007. Issuers are taking advantage of the historically low interest rates to refinance and sell additional settlement revenues. This week, California’s Golden State Tobacco Securitization Corp. will be coming to market with a $1.7 billion tobacco issue enhanced by a pledge from the state to seek an annual appropriation for debt service and operating expenses should settlement payments fall short. Proceeds will be used to repay existing tobacco bonds that do not benefit from a pledge from the state and so are more exposed to a shortfall in settlement payments. Other issues include a $621 million sale last month in Rhode Island and a proposed $875 million new money deal from Louisiana later in 2015. In 2014, only about $175 million of tobacco bonds were sold.

The official statement for the $1.7 billion for the California issue includes the latest smoking decline estimates of James Diffley, a senior director at IHS Global Inc. He forecasts that total consumption in 2045 will be 104.0 billion cigarettes (or 104.6 billion including roll-your-own tobacco equivalents), a 61% decline from the 2014 level. The report projects that from 2015 through 2045 the average annual rate of decline is projected to be approximately 3.0%.

In April 2013, IHS Global presented a similar that projected consumption in 2045 of 105.7 billion cigarettes (including roll-your-own equivalents), reflecting an average decline rate of 3.0%.

The proposed Louisiana Tobacco Settlement Financing Corp. issue would   securitize the remaining 40% of the state’s share from the Master Settlement Agreement with tobacco companies. The bond would generate revenue for operating purposes to plug projected budget gaps over the next seven years by funding the state’s higher education scholarship program. The plan is controversial and is subject to approval by the Legislature and other state agencies.

Louisiana securitized 60% of its tobacco settlement revenue in 2001 with the sale of $1.2 billion in bonds. The new securitization is expected to go before the State Bond Commission April 16, and the Joint Legislative Committee on the Budget May 20. If approved by the legislature, the bonds likely would be sold in June.

The key for investors is to determine which consumption scenario they believe in. In May 2014, Moody’ Investors Service estimated that 65%-85% of the aggregate outstanding balance of all tobacco settlements bonds that Moody’s rates, will default. More recently, S&P estimated that cigarette shipments will decline 5.25% in the next two years and 4.75% thereafter.


Last week, the California state government imposed new mandatory restrictions on lawn watering and incentives to limit water use in hotels and restaurants as part of its latest emergency drought regulations. Gov. Jerry Brown also announced a $1 billion plan to support water projects statewide and speed aid to hard-hit communities already dealing with shortages. Federal water managers have already announced a “zero allocation” of agricultural water to a key state canal system for the second year in a row. This moves come after the state has fallen behind targets to increase water efficiency in 2015 amid the state’s worst drought in 1,200 years. California’s snowpack is now at a record low—just 12 percent of normal.

The situation highlights the long standing divide between urban and agricultural water users. California’s cities have more than enough water to withstand the current drought and then some. They have low water usage per capita. Agriculture uses 80 percent of California’s water—10 percent of that on almonds alone. That may not be sustainable as  abnormally dry conditions have been recorded in 11 of the last 15 years.

So small agriculturally based water credits remain the ones with the most credit vulnerability while the larger urban districts have by and large adjusted their usage and rates to the current environment.

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 March 19, 2015

Joseph Krist

Municipal Credit Consultant


Initial oral arguments were presented to the Illinois Supreme Court last week. Solicitor General Carolyn Shapiro offered the initial argument and cited Illinois’ need to protect the public welfare in the face of a fiscal emergency as a basis for cutting pension benefits despite their state constitutional protections. The court’s seven justices will decide the fate of legislation approved in December 2013 that reduced benefits with the goal of stabilizing a system facing $111 billion in unfunded obligations that has dragged down the state’s bond ratings and threatened its fiscal solvency.

A circuit court judge last November found that the legislation violated the pension clause adopted in a 1970 constitutional convention that gave contractual status to pensions and protects them from impairment or diminishment.

In the state’s view, the justices must decide whether the state is correct in its position that “the pension clause provides the same robust but not absolute constitutional protections provided to all contracts”. Or it can side with unions and the plan participants who are challenging the changes and find that it is instead a “categorical and absolute ban on any reductions to pensions even under extraordinary circumstances,” said the Solicitor General.

She also said that “Plaintiffs position is remarkable”. “If the state’s bond rating collapsed rendering borrowing prohibitively expensive, pensions would be entirely off limits regardless of the essential state services that might have to be eliminated.” If a natural disaster struck, pensions could not be even temporarily reduced, she added.

Shapiro acknowledged that such scenarios were extreme. But that is what plaintiffs are asking for,” Shapiro went further. “It is the state’s solemn responsibility to protect the public interest, the public health, safety and welfare in extreme situations but the necessary consequence of what plaintiffs are demanding and circuit agreed would tie the state’s hands when its need to act is most pressing.”

The State seeks to portray the diminished and impaired language as a reference to the enforceable contract status afforded to pensions, not to the pension benefits themselves and argued that past contract law precedent over the last 150 years allow the state to modify a contract under some circumstances. The State argues that there is little debate that the state is not facing a fiscal crisis given its budget deficit, massive unpaid bill backlog between $5 billion to $6 billion, and a credit rating that is the weakest among states.

The state further argued that “Like all contracts, they can be altered…they are not absolute” and argued that if the protections are absolute the clause does not legally meet the definition of a contract as the state constitution allows for contract modifications.

The attorney representing the union plaintiffs asked the court to look at both the plain language of the pension clause and the intent of the delegates to the 1970 constitutional convention that established the pension clause. It is “explicit, clear and unambiguous” and “is subject to no stated exception,” and the language is so “simple and plain” that the voters’ guide on the constitutional changes simply said “this section is new and self-explanatory.” The unions contend that the drafters anticipated the very situation that the court is now reviewing by which a General Assembly would act during a time of fiscal distress to “invalidate a constitutional protection” and so created “a binding contractual relationship for public employees” .

The state contends the U.S. Supreme Court has long held that a state can’t enter into binding contracts that would preclude it from exercising its police power in the future to protect the public welfare while the unions accuse the state of wrongly applying federal law. Justices pressed the state’s lawyers on whether a ruling in its favor would give it too much power, potentially unleashing future attacks on statutory and constitutional provisions. Justice Robert R. Thomas asked whether granting the use of police powers would give the state too great a “license” to modify its contractual obligations.

Shapiro stressed that the state constitution provides only a few exceptions for such modifications. She further argued that if the justices agree that the pension benefits are subject to police powers, a check on its power lay in future arguments that would be made at the circuit court level.

“The lower court will conclude whether the circumstances justify the state’s actions,” she said. Justices also questioned how the state’s pension funds sunk so low, suggesting it was a mess of the state’s own making. The state pinned the blame on the recession and economic conditions with inflationary levels driving big cost-of-living adjustments and stressed that the pension cuts don’t put the tab for past underfunding on employees but only the costs going forward.

One justice questioned whether the state faces what it considers a dire budget situation due to the state General Assembly’s failure to extend the 2011 income tax hike. The higher rates partially expired and lawmakers have not acted to make up the lost revenue.  Justices questioned why the state –if it in the midst of fiscal emergency – has asked the court to decide only whether the pension contract is subject to modification under state police powers and to then send the case back to the lower court for review. Justices said the case only would land back before them delaying legislative action possibly on new reforms. The state said it believed there would be sufficient time for lawmakers to act.


Citing “a difficult second half of the year,” the underfunded, $27 billion-asset Pennsylvania State Employees’ Retirement System says its investments returned only 6.4 percent last year, below the system’s annual target of 7.5 percent, according to a report by Chief Investment Officer Tom Brier.

SERS’s stocks, bonds, real estate and hedge funds all posted returns below the fund target. Only one category, “alternative investments,” posted higher returns than the benchmark, thanks in part to soaring private equity valuations attributable to the strong U.S. stock market of the past few years. But even alternative investment returns lagged, posting a loss of 0.3 percent, during the fourth quarter of last year as stocks turned down.

New Pennsylvania Gov. Tom Wolf in his recent budget address called for SERS and the teachers’ pension system PSERS to reduce their reliance on high-fee private managers, and put more in indexed investments. A majority of the SERS board seats are held by legislators and appointees who in the past supported buying a wide range of investments from private managers. The results were announced as debate heats up over the Governor’s inclusion of a $3 billion pension issuance as a part of his budget plans for FY 2016. Bonds to fund pension funding have been long championed by Democratic legislators in the Commonwealth but did not have gubernatorial support. The election of Gov. Wolf is seen by pension bond supporters as creating a more favorable environment for consideration of such a debt issue.

We do not look favorably on the issuance of pension bonds for funding purposes. we equate the issuance of debt for what are arguably current expenses as bad policy and a negative ratings impact.


Gov. Alejandro García Padilla worked to boost support for his tax-reform plan to a skeptical public earlier this week through a taped, prerecorded address Monday evening, March 9. The governor backed his reform as the best way to fix a broken system, and said nobody could defend Puerto Rico’s current “unjust” tax system. García Padilla announced no changes to his tax-reform plan, despite strong opposition from nearly every sector of society, as well as nearly daily protests in the past week. “I am going to the finish line to do what is right,” he said. “Puerto Rico’s tax system is unjust. I didn’t come here to put a patch, but to fix it.”

The heated rhetoric that has accompanied support for the plan continued in the Governor’s speech. The governor said the Treasury Department “confiscates” taxes before salaried workers get their pay, while nonsalaried professionals report an average $16,500 annually in earnings. Moreover, he said 82% of all taxpayers in Puerto Rico are either poor or middle class. García Padilla sought to reassure consumers, saying that the new 16% value-added tax (VAT, or IVA by its Spanish acronym) that is at the heart of his reform wouldn’t apply to the “immense majority of what you buy,” citing exemptions to non-processed food, automobiles, education, prescription drugs and most medical services.

“We live in an unjust system and have to make it just. It’s like a salary increase. You, not Treasury, will decide what you will pay in taxes,” the governor said. He criticized economists who have criticized implementing the reform at a time of economic crisis, saying the 160 countries that have a VAT implemented the tax system in similar situations.

While the governor redoubling his efforts on behalf of the reform in his message, some legislative leaders such as House Finance Committee Chairman Rafael “Tatito” Hernández and Senate Finance Committee Chairman José Nadal Power said changes would be needed to win sufficient support for passage in the Legislature. One possibility is that a substitute measure would either increase the 7% sales & use tax (IVU by its Spanish acronym)to 10%, or have a VAT of 12%. Along with tax reform there is support for the executive branch to reduce spending by $250 million to $500 million annually, about half the amount initially proposed by Senate President Eduardo Bhatia.

Meanwhile, technical amendments to a bill boosting the petroleum-products tax are still necessary for Puerto Rico to undertake a bond issue of nearly $3 billion, which it needs to shore up the Government Development Bank’s liquidity, refinance existing loans and keep the government afloat for the next two years. Lawmakers had previously approved the petroleum-products tax hike that will support the issue, but further amendments were needed to make the bond transaction viable. This month, the excise tax on a barrel of crude oil will be increased to $15.50 from $9.25.

Lawmakers already amended the legislation once to clarify language regarding when the petroleum-products tax hike takes effect and other related issues. Both the House and Senate approved amended legislation to take away the limit placed on the discount they could offer investors, but that isn’t sufficient to get a $2.95 billion deal done.

Another factor is the oil-tax hike escalator. Without it, the government can only borrow $2 billion, and hedge-fund investors don’t want to participate unless it is a $2.95 billion deal. They want to ensure the government stays out of the market for the next two years to protect the value of the bonds they will buy. Bond issuers will also likely participate in the deal if the escalator is in place, which will also work to make the deal more attractive.

Another important provision is the underlying security of pledged revenue, and language protecting it from being clawed back. Lawmakers have already agreed to extend a general-obligation constitutional guarantee for the deal, as well as giving investors the right to sue in New York City courts to resolve any claims arising from the deal. Investors are also pressing to have Puerto Rico commit to revenue and spending cut targets, with penalties for missed targets.

The Senate approved a bill last week with stronger “anti-clawback provisions” and an adjustment clause to ensure the tax would raise sufficient revenue to pay for the bond issue in the future. However, by this week’s deadline, the House hasn’t acted, although sources said the bill “was being prepared for the governor’s signature.”


The total amount of outstanding municipal securities and loans in the market rose 0.6% to $3.65 trillion in the fourth quarter of last year. Bank holdings increased 2.5% and mutual fund holdings rose to a record high of $658 billion.

The Federal Reserve Board released the data this week in its quarterly Flow of Funds report. The total size of the market was up from $3.63 trillion in the third quarter of 2014, but still experienced an overall year-over year decline from $3.67 trillion at the end of 2013. The size of the market has generally been declining for the past several years.

Bank holdings have risen sharply in recent years, totaling $452 billion at the end of 2014 compared to $419 billion the previous year and only $255 billion in 2010. Money market mutual fund muni holdings were up 1.1% to $281.7 billion in the fourth quarter, the only quarterly increase of the year. The category has dropped sharply since it was $386.7 billion at the end of 2010 and $509.5 billion at the end of 2008.  Dealers held $18.9 billion of munis at the end of 2014, a $2.7 billion increase over the previous quarter but a steep decline from the $40 billion dealers accounted for in 2010.

State and local governments accounted for $2.9 trillion of muni debt, with nonprofit organizations and industrial revenue bonds making up the balance. $2.87 trillion of those munis are long-term obligations, the Fed data shows.

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 March 12, 2015

Joseph Krist

Municipal Credit Consultant


The issue of municipal issuers’ disclosures of financial and operating data is back in the spotlight. Speaking at the National Municipal Bond Summit last week, Municipal Securities Rulemaking Board executive director Lynnette Kelly said there was a 40% increase in the financial and operating documents issuers filed to EMMA between June 2013 and June 2014. That is greater than the 7% increase the MSRB normally sees year over year, she said. At the same disclosures of bank loans have been disappointing.

Ms. Kelly attributed some of this increase to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative. The MCDC, announced last March, allowed both issuers and underwriters to voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. Underwriters had to report by Sept. 10 and issuers by Dec. 1 last year.

The SEC was focused on issuers who maintained in offering documents that they were fully in compliance with their self-imposed obligations to file annual financial and operating information by certain dates, when they had actually filed the documents late or not at all. SEC offered lenient settlement terms in exchange for the voluntary reporting under the MCDC program.

The MSRB began urging muni bond issuers to voluntarily post information about their bank loans on EMMA in 2012. Since then it has only received 88 such filings. Kelly said,  “That is far too low.” Concerns regarding such loans have grown as issuers have increasingly turned to bank loans to meeting their financing needs, typically because of lower interest and transaction costs, a simpler execution process, the lack of need for a rating, greater structuring flexibility, or the desire to deal to interact with a bank rather than multiple bondholders. Bank loans is a term used broadly to mean a bank’s direct loan to an issuer or the private placement of an issuer’s bonds to a bank. But there are no requirements that these be disclosed.

The MSRB, rating agencies, and some market groups have all said it’s important for issuers to disclose such loans, because they could affect an issuer’s financial condition, its credit or liquidity profile, as well as its outstanding bonds and the holders of those bonds. Ms. Kelly’s comments coincided with the National Federation of Municipal Analysts release of a paper detailing what disclosure practices it thinks should be adopted for bank loans.

In January, the MSRB made its most recent call for disclosure of bank loans well as other alternative debt such as direct loans from hedge fund investors. “Where we’ve not seen an increase in disclosures and would like to is … bank loans,” Kelly said. Kelly told those attending the conference that the MSRB has urged the SEC to revisit its Rule 15c2-12 on disclosure and that bank loan disclosure is one of the areas the MSRB wants the SEC to address.


University Hospitals in Cleveland and Ashland’s Samaritan Regional Health System (SRHS), a small system anchored by a 55-bed hospital in Ashland OH, last week signed a letter of intent to merge. Should the merger close, SRHS will become part of the UH system like Parma Community General Hospital and Elyria’s EMH Healthcare did in 2013. Samaritan, which employs 35 physicians, would be UH’s southernmost outpost in the state. This is yet another sign of the changes wrought by the ACA. Those changes reward efficiency and scale, two things which are not characteristic of smaller stand alone facilities. UH has been pursuing other mergers with smaller institutions with various degrees of success. We expect that the trend of mergers in the industry will be long-term regardless of the outcome of current legal challenges to the ACA.


Connecticut’s governor released his proposal for a budget for the biennium beginning in July. The budget reflects General Fund expenditures of $18.0 billion for FY 2016, cutting $590 million from current law spending levels.  In addition, it cuts more than $753 million in FY 2017. The budget is $6.3 million below the spending cap for FY 2016 and $135.8 million below for FY 2017.  Payments on the state’s long term obligations and debt service will not be deferred, whether contributions to the state’s pension system or paying off Economic Recovery Notes.  The budget includes a proposal to lower the state sales tax rate albeit by widening the base.

The budget maintains funding for statutory formula grants at the FY 2015 level, including Education Cost Sharing (ECS) and Payment in Lieu of Taxes (PILOT).  Additionally, funding is increased for Municipal Projects by $3.6 million per year to provide $60 million annually to support local infrastructure. It establishes a new $20 million grant for green infrastructure, level funds Small Town Economic Assistance Program (STEAP) and the Local Capital Improvement Program (LoCIP), and maintains funding of $60 million annually for Town Aid Road (TAR). It maintains support for education, by keeping the commitment to local school construction (with nearly $600 million pledged annually) and continues funding for the teachers retirement system.

Health costs are a prime target for spending reductions. The majority of the reductions in DSS impact reimbursements to Medicaid providers.  The state’s share of Medicaid expenditures is reduced by: $43.0 million in FY 2016 and $47.0 million in FY 2017 by reducing provider rates ($107.5 million in FY 2016 and $117.5 million in FY 2017 after factoring in the federal share of Medicaid expenditures); $10.0 million in each year of the biennium by restructuring rates to achieve the savings assumed in the enacted budget for medication administration ($20.0 million in each year of the biennium after factoring in the federal share); $6.2 million in FY 2016 and $6.8 million in FY 2017 from changes to the pharmacy dispensing fee and reimbursement for brand name drugs ($18.9 million in FY 2016 and $20.6 million in FY 2017 after factoring in the federal share); $5.1 million in each year of the biennium from the elimination of the supplemental pool for low‐cost hospitals ($15.1 million in each year of the biennium after factoring in the federal share); $4.3 million in FY 2016 and $5.1 million in FY 2017 from ensuring that ambulance providers do not receive a combined Medicare and Medicaid payment that is higher than the maximum allowable under the Medicaid fee schedule ($8.6 million in FY 2016 and $10.2 million in FY 2017 after factoring in the federal share).

The budget also devotes significant resources to highways and mass transit, particularly the state’s commuter railroads. Known as  Let’s Go CT!  the plan will include expanded rail service on existing Metro‐North and Shore Line East lines, and expanded service on the New Haven‐Hartford‐Springfield line.  Additional station construction will also be complemented by Transit‐Oriented Development (TOD) and responsible growth programs which will enable the impacted communities to add more economic and housing options for their residents and visitors, while preventing sprawl. An additional $2.78 billion in transportation bond authorizations is recommended over the next five years to begin to implement Let’s Go CT!


Last week in Kansas, the state Senate passed a bill, by a vote of 21-17, that would authorize the sale of $1 billion in POBs, the proceeds of which would be provided to the Kansas Public Employees’ Retirement System pension fund, which is roughly 60 percent funded, with a projected $9.8 billion shortfall. The $1 billion in new bonds is less than the $1.5 billion that Republican Gov. Sam Brownback’s administration had lobbied for.

Proponents are relying on a study by KPERS in which its actuaries concluded the House bill would save the state $2.8 billion in contribution obligations to the plan. Gov. Brownback has already reduced the state’s statutory contribution rate for fiscal year 2015. Supporters argue that the current historically low level of interest rates means that POBs are a relatively safe bet for state taxpayers. The cash raised would return a higher rate than the cost to service the debt, so long as the pension investments return their historical averages over the term of the bond, which can be as long as 30 years. Servicing the bonds is expected to cost Kansas $90.3 million annually, according to a blog post by Republican state Rep. Troy Waymaster.

The bill will now move to the Kansas House, where, last week, the Pensions and Benefits House committee passed its own version of the bill, authorizing $1.5 billion in POB sales, and capping the maximum interest rate on the notes at 5 percent.

An opposite approach is being taken in Kentucky. After that state’s House voted to authorize $3.3 billion in POBs for the state’s stressed teachers’ pension, the Senate strongly rejected the proposal, killing it by a 28-8 margin. The Kentucky Teachers Retirement System is funded at just over 50 percent, with nearly $14 billion in unfunded liabilities. Republican Robert Stivers, the Kentucky Senate president, said the POBs would create debt obligations that would tie up future governors and legislatures in issuing debt for other necessary projects.

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 March 5, 2015

Joseph Krist

Municipal Credit Consultant


Once again the market finds itself disappointed by the lack of timely follow through by the government of PR. The pattern of failed promises and lack of decisive timely action has become more than tiresome but unfortunately it is the basic m.o. in regard to its ongoing debt crisis. The latest example is the announcement on February 27 that PREPA continues in talks with creditors on the possibility of extending leniency agreements, which expire by its mandate on March 31, 2015.

PREPA said the Authority continues in productive talks with creditors on extending existing forbearance agreements,” through Lisa Donahue who leads the  official restructuring of the public corporation. “We have been working diligently with the Authority and all stakeholders in the operational transformation of the company.   To date, we have progressed significantly, but much remains to be done and as a result, we have not finalized the plan to present to creditors. Some time ago, we informed creditors would not reach the agreed date. Creditors are aware of the situation and have not taken any adverse action, “said Donahue.

“While most of the media coverage has focused on restructuring the debt of the Authority and talks with creditors, it is important that all employees, suppliers and customers understand that the restructuring of the Authority includes an operational transformation complete to ensure the reliability of service. We continue to work on efforts to create the infrastructure and financial resources needed to overcome the energy challenges of Puerto Rico and transform the Authority in a self-sustaining corporation, “said John F. Alicea Flores, executive director of the public corporation.

At some point the government of PR must realize that the juxtaposition of events such as that which occurred last week – the House hearings on Chapter 9 authorization followed by the PREPA announcement the next day – simply reinforce the image of disarray and frankly ineptitude in the handling of the restructuring needed for much if not all of Puerto Rico’s debt. The longer it takes the government to act decisively and competently, the more difficult it will be for the island to recover and move on. The trail of broken promises and deadlines must come to an end.


Favorable relative trends in yield movements benefitted issuance last month. Long-term municipal bond issuance in February increased 78.5% to $29.46 billion from a year earlier, the seventh monthly gain in a row, as refundings more than doubled to $14.53 billion from $5.11 billion in February of 2014, according to Thomson Reuters. Advanced refundings were the catalyst for issuance as long and intermediate tax exempt yields declined whie shorter dated treasury yields increased. AA 10 year yields are about 50 basis points lower this year relative to last year, while the 30 year yields are about 90 basis points lower in yield from this time last year.

Some estimate that if volume continues at the pace through February, yearly issuance could total $440 billion. Volume for the two months adds up to $56.54 billion, the most since 2010’s $59.714. January volume alone annualized to $450 billion.  New-money issuance increased 8.7% to $10.48 billion from $9.64 billion in February 2014. Negotiated issues rose to $21.85 billion (635 deals) from $10.82 billion (423 deals) for February of last year. Competitive deals increased to $7.46 billion (357 deals) from $3.78 billion (237 deals) while private placements dropped to $151.6 million from $1.90 billion.

Education, utilities and general purpose led the way. Education rose to $11.80 billion (501 deals) from $5.57 billion (257 deals), while general purpose rose to $6.78 billion (258 deals) from $3.77 billion (148 deals) in February 2014. State agencies increased issuance to $6.81 billion from $2.69 billion. Cities and towns lifted issuance to $3.60 billion from $2.06 billion while district bond sales rose to $8.63 billion from $4.37 billion. Bond insurers increased their footprint increasing par value insured to $1.93 billion in 166 deals compared to $1.16 billion in 93 deals in 2014.

The top five state issuers this past month were Texas, California, New York, Pennsylvania and Washington. Texas remained first, with $6.65 billion, up from $5.54 billion. California and New York switched positions, with California in second, at $5.43 billion from $3.84 billion. New York was third, at $4.15 billion versus $4.50 billion in 2014. Pennsylvania was fourth up from 12th, rising to $3.66 billion from $903.6 million. Washington state was fifth at $3.16 billion, up from $1.06 billion in 2014.


Gov. Bobby Jindal of Louisiana introduced an FY 2016 budget proposal last Friday with deep cuts designed  to deal with a $1.6 billion shortfall and an entrenched structural deficit. The proposed cuts are substantial, even after years of moderate and severe reductions. They would potentially result in the closures of community health care clinics and historic sites. Hospitals partly privatized by Mr. Jindal would get $142 million less than they had sought. Spending on higher education would be lower by $141 million, a further 6 percent reduction after years of cuts.

The plan attempts to avoid some of the worst-case situations by reworking certain tax credits ways that would make an additional $526 million available to meet current expenses. Previously, Gov. Jindal has been firm in his opposition to new taxes. Even the renewal of existing taxes has been off limits. Officials insisted that the proposed changes did not constitute a tax increase, because they would simply take some refundable tax credits and turn them into nonrefundable tax credits. The change would not raise taxes as far as the state is concerned but, it could result in a net higher tax burden for businesses when certain local taxes are included. The plan also includes a complicated arrangement to raise cigarette taxes to pay for a tax credit that families could use to offset a new cost, called “an excellence fee” for students attending colleges and universities.

A fight is expected in the Louisiana Legislature as many believe that greater changes are needed in the state’s generous and expensive distribution of tax credits and exemptions. At the same time, significant pressure is expected from business groups against the proposed tax credit changes. The president and chancellor of Louisiana State University  called the current proposal “a bad budget for higher education,” but also said the situation would be devastating if the Legislature were to turn down the tax credit changes and fix the deficit on cuts alone. In that case, Mr. Alexander said, thousands of classes would have to be canceled, the state’s sole dentistry school and as many as half of the agriculture centers would have to close.


Gov. Tom Wolf issued his first budget proposal as the new chief executive. The budget reduces the Corporate Net Income Tax (CNIT) from 9.99 percent to 5.99 percent – improving the commonwealth’s ranking from second highest to fourteenth-lowest and bringing Pennsylvania’s tax rate below the national average and below all of its neighboring states. It ends the often delayed phase out of the Capital Stock and Franchise Tax by eliminating it effective January 1, 2016. The personal income tax would rise to 3.7 percent – the third lowest of all states with an income tax and significantly lower than all of Pennsylvania’s surrounding states. In addition, a family of four earning up to 150 percent of the poverty level (approximately $36,000) would pay no state income taxes.

Funds reserved for property tax and rent relief will be transferred from personal income tax revenues into a restricted account. Beginning in October 2016, $3.6 billion will be transferred to the Property Tax Relief Fund and distributed to homeowners and renters. The sales tax is proposed to be expanded to be more consistent with the modern economy and the rest of the nation. The sales tax rate would increase by 0.6 percentage points, and exemptions for food, clothing and prescription drugs would remain in place. Over the next two years, the budget provides an $80.9 million increase to Penn State University, the University of Pittsburgh, Temple University and Lincoln University.

Holders of local school district credits will look favorably on proposed increases in education funding. Proposed is a $400 million (7.0 percent) increase in the Basic Education Subsidy. This increase – the largest in Pennsylvania history – will fully restore the Accountability Block Grant and Educational Assistance Program funds that were previously cut. In addition, as part of the Basic Education Subsidy, school districts will receive a reimbursement for approximately 10 percent of their mandatory charter school tuition payments. This would have a positive impact on the Philadelphia School District. Additional resources will be provided to help close the funding gap based on Basic Education Subsidy cuts instituted since the 2010-11 school year.

A $100 million (9.6 percent) increase in the Special Education Subsidy is also proposed by the Governor. This increase will continue Pennsylvania’s transition to the formula enacted in 2014 reflecting the work of the bipartisan legislative Special Education Funding Commission. The budget incorporates that formula as a permanent component of the state’s education law, known as the Public School Code. Another item is a $120 million (87.9 percent) increase in high-quality early childhood education to enroll more than 14,000 additional children in Pennsylvania Pre-K Counts and the Head Start Supplemental Assistance Program.

We expect that the final budget will be substantially different. There is however, support for local property tax relief and the expansion of the sales tax base as well as increased education  funding.


Sweet Briar College, a 700 student women’s school in VA announced that it would close at the end of the 2014-2015 school year. Continuing declines in demand created operating pressures including tuition and fees covering less than  one-third of expenses. A 10% operating loss and a 10% spend rate on its endowment reflected unsustainable trends. The school’s $25mm of debt outstanding (B- by S&P) can be paid off from remaining endowment funds which will also be applied to severance costs and the cost of assistance to students who need to transfer. The demand for single sex, rural liberal arts colleges has continued to decline and one should not be surprised to see additional instances where institutions close when they can no longer effectively compete in a changing marketplace.

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.