Monthly Archives: June 2015

Muni Credit News June 25, 2015

Joseph Krist

Municipal Credit Consultant


Thirty six municipal bond underwriters operating in the $3.7 trillion muni market will collectively pay about $9 million to settle civil charges over fraudulent offerings, as part of the first settlement of its kind with the U.S. Securities and Exchange Commission. The SEC said that the charges stemmed from a March 2014 invitation to brokers and bond issuers to voluntarily report disclosure violations in offering documents, such as material misstatements and omissions.

The firms represented about 70 percent of the dollar value of all municipal bonds issued in the United States during the four years ended on Sept. 30. The settlement requires each firm to pay civil penalties based on the number and size of the fraudulent offering. The maximum penalty is $500,000 for large firms and $100,000 for smaller ones. The firms also must hire independent consultants to review their policies and procedures.


With PR fast approaching its July 1 fiscal cliff, Governor Alejandro García Padilla confirmed that his administration recently pursued a proposal to request that the U.S. Congress allow the Puerto Rico government to declare bankruptcy. García Padilla said he has since rejected the proposal in favor of a current effort to get rules that would allow only Puerto Rico’s public agencies to file for bankruptcy under Chapter 9.  A U.S. House committee is studying the issue amid growing concerns about the government’s ability to repay its debt and is holding hearings this week.

Pedro Pierluisi, Puerto Rico’s representative in Congress, criticized García Padilla for pursuing such a proposal privately. The Government Development Bank has warned that the government could have to shut down in the coming months if new measures to generate revenue are not enacted. García Padilla recently signed a bill to increase the sales and use tax (IVU by its Spanish acronym) from 7% to 11.5% and to create a new 4% tax on professional services. The sales tax increase goes into effect July 1 and the new services tax on Oct. 1, with a transition to a value-added tax by April 1.

Legislators are now debating a proposed $9.8 billion budget which includes $674 million in cuts and sets aside $1.5 billion to help pay off Puerto Rico’s debt. The budget has to be approved by June 30. In the meantime, Senate Bill 1350, which aims to enhance oversight powers and immunity protections for Government Development Bank (GDB) officials now moves to the governor’s desk after a conference committee version was approved by the Legislature.

The bill keeps immunity language, which stipulates that GDB directors, officers and employees “shall be indemnified by the bank and shall not have any personal civil liability to any entity for actions taken or not taken in good faith in their capacity and authority, absent clear and convincing proof or gross negligence comprising reckless disregard of, and failure to perform, applicable duties”. The bill also calls for the Senate’s approval of GDB directors appointed by the executive branch, beginning in January 2018.

It keeps provisions for the creation of the Audit and Risk Management committees, and places lending restrictions on loans provided by the GDB. The bank would be empowered to require from public corporations and instrumentalities access to any financial information and related documents it deems necessary, with sanctions established for noncompliance. The GDB would also be allowed to pass judgment on the “reasonability” of the government revenue estimates for each fiscal year.

The bill includes provisions requiring the bank’s president to submit a monthly report on new loans to the legislature, as well as amendments to existing ones approved by the bank’s board; appear once a year at both chambers to present the bank’s annual report on public debt; and submit both the Commonwealth’s Financial Information & Operating Data Report and Quarterly Reports within five days of publishing them. The bill also creates a Commission for the Integral Audit of Public Credit with broad powers to analyze and audit everything related to Puerto Rico’s public debt. It would act autonomously, and would comprise members from both public and private sectors, as well as academia.

Many of S.B. 1350’s original provisions, including those allowing for the appointment of emergency managers for troubled public corporations and instrumentalities, and the transfer of deposits from municipalities and the University of Puerto Rico (UPR) to the GDB were eliminated in order to secure the necessary votes for passage in both chambers.

To address the Government Development Bank’s liquidity,  a bill that seeks to raise short-term debt from some public corporations, as well as requiring reserves to cover general-obligation (GO) debt, was approved late Tuesday by the House. House Bill 2542 now moves to the Senate, which would have to consider it before Thursday, the last day for both chambers to approve measures during this session, while bills at conference committees have until June 30.

Amendments to the measure include provisions allowing the Treasury Secretary to “suspend, totally or partially” monthly deposits made to cover principal and interest payments on GO debt, if it fails to either secure $1.2 billion in tax & revenue anticipation notes (TRANs), or at least $2 billion in a bond deal backed by the latest hike to the petroleum-products tax.  The House-approved bill also requires the Office of Management & Budget (OMB) to reserve $250 million in the proposed fiscal 2016 budget, which would bring it down to $9.55 billion from the initially projected $9.8 billion, he indicated.

The bill would allow use of about $400 million for TRANs from investment funds of the Automobile Accidents Compensation Administration (ACAA), Temporary Nonoccupational Incapacity Insurance (Sinot) and State Insurance Fund (SIF). While Sinot and ACAA would provide $15 million and $50 million, respectively, SIF’s share stands to total about $335 million. The bill adds that these investments would still be carried out, regardless of the credit rating of the instrument or any restriction placed by the public corporations’ investment policies or contractual obligations.

During the House debate, the minority leader declared ominously, “we are telling bondholders that if you want certainty, invest first in Puerto Rico,” adding, “We will pay the GOs, but we have to restructure the rest of the debt.”

Under a scenario in which the government can’t accomplish any of two financing plans, the minority leader stated that with the “combination of the $400 million from the public corporations, the additional 4.5% to the sales tax, and not doing the monthly reserves for GOs, we would keep the government operating.”

Government officials have previously said that absent TRANs or short-term financing at the beginning of the fiscal year, Treasury could potentially run out of cash during the first quarter, which would affect government operations and services, as well as exacerbate the island’s economic and fiscal crisis. Several options are under consideration—including the exchange of short-term notes worth as much as $4 billion—as it pursues a parallel initiative with the U.S. Treasury Department. The GDB’s net liquidity position was $778 million, as of May 31.  It has been reported  that Puerto Rico’s government has lobbied the U.S. Treasury to purchase GDB notes in a last-resort effort to increase much-needed liquidity.

Meanwhile, as a significant July 1 principal payment looms, Puerto Rico Electric Power Authority (PREPA) and its creditors entered into yet another forbearance agreement extension, until June 30, while they continue to negotiate a restructuring plan for the financially troubled utility that prevent a potential default and court-mandated receivership. Bond insurers would have to cover much of the July 1 payment, if PREPA were to miss it. In a recent filing, U.S. Bank N.A. PREPA’s trustee, indicates that it doesn’t hold sufficient funds or investments to cover the July 1 payment, adding that no deposits have been made by PREPA to the trustee since March 31.

It said that “in advance of the July 1, 2015, bond payment date, the trustee may be required to liquidate investment obligations held in the reserve account, including substantial long-term government obligations.” Failure to extend the forbearance protection before agreeing on a restructuring deal would virtually allow creditors to ask the court to oversee the utility’s overhaul by placing a receiver in charge of the process if PREPA were to default on any of its debt obligations. Under that scenario, a default notice would be issued by the trustee, which would give PREPA 30 days to address the issue. Failure to do so would result in an event of default, allowing creditors to take the matters to court.

The net take-away is that PR well deserves a mid or lower range CCC rating. Only Moody’s has gone down that far. We think that the B and CCC+ ratings from Fitch and S&P are still too generous.


Sweet Briar College, the women’s liberal arts college in rural Virginia that announced it would close in August — setting off protests and lawsuits from students, faculty and alumnae — will remain open for at least one more academic year under an agreement announced Saturday by the attorney general of Virginia. The AG said the agreement, which includes plans for electing a new president and board, and calls for an alumnae group to donate $12 million for Sweet Briar’s continuing operations. The agreement also calls for the easing of restrictions on $16 million from the college’s $85 million endowment — money that, combined with the $12 million from alumnae, will help keep the school open. The alumnae group has agreed to deliver the first $2.5 million of its donation by July 2.

A judge in Amherst County, Va., whose county attorney sued to keep Sweet Briar open, approved the settlement on Monday. Away from the obvious issues – the conversion of pledged donations to hard cash, recruitment of a freshman class mid-summer, and an effort to repatriate students, faculty and employees who had  been told to leave, many of whom have already made plans to attend other schools – the decision raises real questions for debt holders. The closure plan provided for the full redemption of the school’s outstanding bonds. While the call could be seen as premature, redemption would have provided full payment and relieved the bondholders of the principal risk associated with a weak credit. Now there has been no call, and without a long-term plan, bondholders remain in limbo with potentially $16 million less in endowment assets available.

Under the memorandum of understanding released by the attorney general, 13 of Sweet Briar’s 23 board members will be replaced by at least 18 new elected members. The new board, the memorandum said, is expected to appoint Phillip C. Stone, a former president of Bridgewater College, a small private college in Virginia, to serve as the new president of Sweet Briar. The agreement also calls for the attorney general to ease restrictions on $16 million from the college’s $85 million endowment — money that, combined with the $12 million from alumnae, would finance operations.

Sweet Briar was founded in 1901 by a wealthy Virginia landowner, who bequeathed her entire estate — a former plantation — for the express purpose of educating young women. How much demand there is for a school best known for its equestrian programs is unknown. Enrollment has been in decline for some time. Fifty years ago, there were 230 women’s colleges in the United States; last year there were 46.

The fact that the school will remain open does nothing to improve the credit from a rating standpoint. The existing S&P CCC is well deserved.

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 June 18, 2015

Joseph Krist

Municipal Credit Consultant


The  season on ice may have finally ended this week, but the action continues off it foe NHL fans. The Arizona Coyotes’ tortured relationship with the city of Glendale took a negative turn last week when the City Council voted to terminate its lease agreement with the team at Gila River Arena. In 2013, the city agreed to pay IceArizona, the team’s ownership group, $15 million a year for 15 years to run the building in return for a share of the naming rights and other revenue.

Bond investors care because there is some $230 million of outstanding debt issued to finance the arena. Action by the Council to void its operating agreement could put into doubt the continued viability of the debt financing. Here is some background.

At the time of the lease agreement, the mayor and some council members opposed it before it was signed, and new council members have since been elected. The city has not released the results of an annual audit of the arena for the 2013-14 fiscal year. It has been reported in the local press that the city’s assistant auditor resigned in April because some of her findings were changed.

The council voted, 4-3, last week to end the agreement citing a state statute that allows an agency to cancel a contract if an employee directly involved with the agreement becomes an employee or agent to the other party. The Coyotes hired the former city attorney as general counsel in 2013.  In November 2013, an ethics complaint with the State Bar of Arizona that the attorney went to work for the Coyotes in 2013 while still being paid a severance by Glendale.

Before the meeting, the City Council announced that the city would consider amending the deal if it “provides certainty and fairness to both parties, especially the taxpayers.” IceArizona responded that the meeting was a “blatant attempt to renege on a valid contract that was negotiated fairly and in good faith.” After the council voted to dissolve the deal the team’s chief executive and president, said the city had violated its obligations under the agreement. The N.H.L. said before the meeting that it was “extremely disappointing that the city of Glendale would do anything that might damage the club.” The league said it expected the Coyotes to continue playing at Gila River Arena.

In 2009, the prior owner of the team put the franchise into bankruptcy. The league took over the team for several years before finding new owners. The Coyotes average of 13,345 fans a game is the third-lowest in the N.H.L. The agenda posted for the Council meeting cited a state statute that allows government entities to end a contract within three years of being signed if a person involved in negotiating the contract for the city is, in effect, an employee or agent of the other party to the contract. The attorney relinquished his duties with the city when his separation agreement went into effect April 1, 2013, three months before the City Council approved a 15-year agreement with the Coyotes. He was paid his full salary through September 2013.

Glendale has still not released its audit of the Coyotes 2013-14 season a year after it notified the team that it would exercise its option to evaluate the team’s financial results. The Coyotes blamed a delay in providing information to the city on the ownership change at the end of 2014, when Barroway became the majority owner. Glendale’s losses for hockey and concerts at Gila River Arena through April were $6.3 million, or nearly 14 percent from a year earlier.

After the announcement, a Maricopa County Superior Court judge granted the team’s request for a temporary injunction to keep Glendale from killing their arena deal. Attorneys for the Coyotes filed legal claims against Glendale over the team’s lease agreement for Gila River Arena, and lawyers appeared in court Friday afternoon for a hearing about a temporary restraining order. Superior Court Judge Dawn Bergin granted the motion for a temporary injunction and set another hearing on the dispute for June 29. The next move will be when the Glendale City Council meets in executive session and decides whether to send the team a letter confirming its vote to sever the agreement.


Tax ideology has had a big influence on state budget policies in recent years. The drive to limit revenues stemming from supporters of the ideology that the only way to control government is to “starve the beast” has had great currency in recent years. This year however, the ability of that ideology to stand the pressure of service demands from constituents has tested the staying power of that ideology. The recent outcomes of budget battles in two states provided two different answers to that test.

In Kansas, it took 113 days to complete this year’s budget session, the longest ever, and more than three weeks longer than the mandated 90 days. Much of the delay was due to debate over taxes after lawmakers passed about $3.8 billion worth of tax cuts in 2012 and 2013. Democrats and moderate Republicans have cited the cuts for the budget shortfalls that have since arisen, while conservatives cite unforeseen cost drivers out of their control like Medicaid growth.

Many acknowledged that the only way to close the gap now was through tax increases. Eventually, they voted to slow the pace of income tax decreases, raised sales taxes and increased the cigarette tax by 50 cents a pack, among other measures. But overcoming the gridlock to reach that deal required long legislative sessions stretching into the early morning. Thursday morning the House failed to pass a Senate plan that leaders were optimistic would pass. Legislative leaders and Gov. Brownback issued several threats about what could happen if a tax bill was not passed — for instance, cutting all state funding for public universities and colleges.

Eventually,  a tax plan was spread over two bills and the first passed at 1:51 a.m. Friday with exactly the 63 votes needed to pass. The second vote opened at 2:24. On that item the initial count was only 59 yes votes. After two hours of effort the necessary votes in the House were obtained. Later Friday, the Senate got exactly the 21 votes it needed to send the bill to the governor’s desk.

In Louisiana, the result was much less straightforward. The $24.5 billion budget passed last week contains so many short-term fixes that next year’s governor and Legislature will inherit a budget deficit of an estimated $1 billion, documents show, and the size of the deficit is only projected to grow in the following years. All four candidates for governor — U.S. Sen. David Vitter, Lt. Gov. Jay Dardenne, Public Service Commissioner Scott Angelle and state Rep. John Bel Edwards, the only Democrat — have said that if elected, they would hold a special legislative session shortly after taking in office in January devoted to finding a long-term solution to the budget problems that Jindal and the outgoing Legislature are leaving behind.

They balanced revenue with spending during the current budget year by continuing to raid the state’s trust funds and resorting to what most analysts would consider to be  gimmicks, including a tax amnesty program that provided only a short-term windfall. In all, the budget passed by legislators in 2014 and signed into law by Jindal contained a record $1.2 billion in one-time money, that is, money that wouldn’t be available in 2015.

After oil prices dropped late last year, legislators and Gov. Jindal had to close a $1.6 billion budget deficit when this year’s session began April 13. After seven years of cutting taxes, Jindal and the Legislature moved in the opposite direction in 2015 and sought to raise new revenue. Legislators chose instead to shave 25 percent of the rebates that companies get from the state when they pay inventory taxes to local governments, increased the cigarette tax by 50 cents to a new rate of 86 cents per pack, limited a number of business breaks and the amount of subsidies for the solar energy and film and television industries.

Adding in a $50 increase in the vehicle title fee to $68.50, the state will raise about $750 million in new money next year. The Governor, in keeping with his presidential ambitions, is claiming it is not a net tax increase following passage of the SAVE fund. Under this measure, no students will pay a higher fee, no one will pay lower taxes and higher education institutions will get no extra money.

But the tax credit included in the plan allows the Governor to claim that it offsets all of the new tax revenue, under rules promulgated by Americans for Tax Reform, a national anti-tax organization headed by the noted anti-tax activist Grover Norquist. A June 9 report by the Legislative Fiscal Office several days before the budget was approved said that it  included $509 million in one-time money — by drawing down more money from trust funds, from the final year of the tax amnesty program and through a one-year plan to reimpose a one-cent sales tax on businesses’ utility bills. Legislators got $7 million for next year only by suspending the program that allows filmmakers to sell their tax credits back to the state for 85 cents on the dollar.

The Legislature found another $73 million in trust funds for the budget. Of that amount, $20 million would come from unclaimed lottery winnings and another $25 million from the state’s Medicaid Assistance Trust Fund. The problem is that the fund has a $1.3 million balance, according to the state treasury’s office, and it last had at least $25 million three years ago. The Department of Health and Hospitals plans to replenish the fund in the upcoming fiscal year through provider fees to make the $25 million available for spending.

The net result is no real improvement in  the state’s already weak budget outlook. This in turn maintains downward pressure on Louisiana’s already weak general obligation debt ratings.


Last week, the new Great Lakes Water Authority signed a lease for Detroit’s water and sewer system, two days before a deadline. This is the first in a number of steps that the Authority must take by Jan. 1, 2016, or the leases terminate and the authority could be dissolved. These steps include getting  customer communities to agree to assign their Detroit Water and Sewerage Department contracts to the authority. It also must reach an agreement with the city and Detroit General Retirement System to manage its pension obligations to the retirement system, which is now frozen.

As far as the system’s debt is concerned, the authority must get at least 51% of bondholders to agree to the transfer of the water system assets and bond obligations from DWSD to the new authority. In addition, it must persuade the bond rating agencies to confirm ratings on the bonds it is assuming from the Detroit Water and Sewerage Department that are at least as high as the current ratings. This anticipates the adoption of a bond ordinance that basically mirrors the current bond ordinance of DWSD and the receipt of  legal opinions on the validity and enforceability of the lease agreement as it relates to tax treatment of bonds.

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 June 11, 2015

Joseph Krist

Municipal Credit Consultant


New Jersey’s highest court ruled on Tuesday that Gov. Chris Christie could skip the pension payments he promised to make in 2011 in the signature law of his tenure. In the short term, it mitigates a huge fiscal crisis just weeks before the state closes its books for the year. In the long term, the 5-to-2 decision by the Supreme Court of New Jersey maintains the negative pressure on the state’s credit which has bedeviled the state’s bondholders throughout Mr. Christie’s tenure.

Christie has aggressively claimed to have fixed the state’s well known pension underfunding problem. He boasted in his keynote speech to the Republican National Convention in 2012 that he had “fixed” the problem of underfunded pensions. Unfortunately, the “Jersey Comeback” the governor regularly cites has seen the state economy lag behind his forecasts, and the nation. As a result Mr. Christie said the state could not afford to make the payments he had promised in the law.

Nine credit downgrades later, “The loss of public trust due to the broken promises” in the law, the court wrote in its decision Tuesday, “is staggering.” The court said that the governor and the Legislature violated the debt limitation clause in the State Constitution when they signed the law requiring the state to make large payments over a series of years. The court supported the view of most fiscal observers when it said  “That the state must get its financial house in order is plain,”. The decision added however, “the responsibility for the budget process remains squarely where the framers placed it: on the Legislature and executive, accountable to the voters through the electoral process. Ultimately, it is the people’s responsibility to hold the elective branches of government responsible for their judgment and for their exercise of constitutional powers. This is not an occasion for us to act on the other branches’ behalf.”

The dispute between the state’s employees and the governor stems from the implementation of the 2011 law and a companion law signed in 2010 requiring public employees to pay more toward their benefits, and in exchange, the state agreed to make the annual pension payments that several governors had ignored. Payments were made for two years, but beginning with the budget for 2014, the governor said he could not balance the budget if he made them. The payment in 2014 was $696 million instead of the $1.58 billion the law required; the 2015 payment was $681 million instead of the $2.25 billion owed.

The unions sued, and a trial court ruled in February that the law had given public employees a constitutionally protected right to those payments. That decision was reversed by the Supreme Court. Predictably, unions called the ruling “devastating” and “indefensible,” saying it was unfair that they had held up their end of the deal, while the Supreme Court allowed the governor to abandon his. In a dissent, it was pointed out that “The decision unfairly requires public workers to uphold their end of the law’s bargain — increased weekly deductions from their paychecks to fund their future pensions — while allowing the state to slip from its binding commitment to make commensurate contributions.”

The legislature is expected to send Mr. Christie a budget that makes the required pension payment in the next fiscal year, which begins in July. The governor however, is almost certain to strike the payment with his line-item veto. He has called on unions to give up more benefits. Unions and Democrats who lent him crucial support in 2011 said Mr. Christie had to guarantee that the state would finally make its payments.


Harbor’s Edge is an upscale continuing care retirement community in Norfolk, Va. It includes amenities, including River Terrace, a dining room with waterfront views originally open to all residents. That changed when management announced, in May 2011, that the River Terrace and certain activities like Fourth of July celebrations would be restricted to independent living residents and off-limits to everyone else. This sparked protests from residents who had lost access to that amenity.

Last month, the Department of Justice issued a complaint which charged that the facility had violated the federal Fair Housing Act by establishing policies that discriminated against people with disabilities and retaliating against those who complained. To settle the case, Harbor’s Edge admitted no wrongdoing, but will pay $350,000 to compensate those harmed, and a $40,000 civil penalty. The consent order also requires the facility to appoint a Fair Housing Act compliance officer, provide training for its staff and adopt a “reasonable accommodation” policy.

“This is a decision that’s going to put the rest of the industry on notice,” said a senior attorney for the AARP Foundation. While the settlement doesn’t create new law, “it’s a continual battle to get compliance” with the Fair Housing Act, according to Justice in Aging, an advocacy group. Such cases rarely generate the large damages that would encourage lawyers to file suits. Now, Mr. Carlson said, “if I’m running a long-term-care facility and I realize there are significant financial consequences, I think, I’d better change the way I do business.” Though complaints of discrimination or segregation more commonly crop up at communities whose residents have very different functional abilities, the Fair Housing Act applies to any senior housing or care facility — and the Justice Department clearly wants administrators to know it’s paying attention. “It’s not an isolated situation,” said Gregory Friel, deputy assistant attorney general for civil rights. “We’re looking into facilities with analogous practices.”

According to press accounts, the facility initially blamed overcrowding believed that allowing people of different disability levels to use the same facilities violated Virginia regulations. The Justice Department saw a simpler motive. “Harbor’s Edge adopted these policies because it wanted to market its facility as a place for ‘young seniors’ who wanted an active lifestyle,” its complaint said. The DOJ sent lawyers to Norfolk to interview Harbor’s Edge executives, residents and family members, and review thousands of pages of documents. Last summer, it notified the facility that it would bring suit, and executives agreed to begin negotiations.

The three-year DOJ order ensures that Harbor’s Edge can’t revert to discriminatory practices for its duration. Other facilities’ policies are also being reviewed such as the independent living section of Redstone Village in Huntsville, AL. The impact of the Norfolk settlement may be letting residents (and lawyers) around the country know that senior communities must make reasonable accommodations to enable them to use facilities. Segregating them in certain parts of their supposed homes because of their need for assistance is not reasonable. It’s illegal.

The existence of such regulations and the potential for financial penalties at already cash strapped facilities is another item of due diligence for investors in this already risky class of credits found in many high yield municipal funds.


A proposed settlement to resolve years of legal uncertainty over a landmark public pension system overhaul was approved Tuesday by a judge who called it an imperfect but fair solution. The judge, Sarah Taft-Carter of Superior Court, overruled objections, putting an end to nearly all the lawsuits by public-sector unions and retirees against Rhode Island over the 2011 reform, which was designed to save $4 billion over 20 years. The deal would preserve about 90 percent of the savings. Lawmakers must also approve the settlement. Speaker Nicholas Mattiello of the House said the changes from the settlement would be incorporated into the budget, which lawmakers are considering. The settlement provides for cost-of-living increases and one-time stipends for retirees.


Recently, we reported that Pennsylvania Governor Tom Wolf was advancing the idea of issuance of $3 billion of pension debt to temporarily address funding shortfalls in the Commonwealth’s pension systems for teachers and other employees. We opined that this was a bad idea. We have always held to that view for a number of reasons. These mostly reflect our belief that the issuance of this debt is no different than the issuance of debt for any other operating expense. Such practices have always been indicators of fiscal irresponsibility and often strong indicators of fiscal difficulties.

A look at the history of such issuance is instructive. At the state level, major issuers of such debt include New Jersey (the first state to use the technique in 1997) and Illinois. Neither of these two states have managed to properly address their pension funding shortfalls even with the issuance. On the local level, pension funding shortfalls continued to bedevil a number of cities even after such issuance. In some cases, the overall fiscal position was made even worse as poor investment of the bond proceeds resulted in continuing shortfalls, no lessening of the current funding expense requirements, and the additional expense o f debt service associated with the issued debt.

Now, a series of decisions in recent municipal bankruptcy proceedings have increased concerns for investors in these bonds. These securities were generally issued with a security pledge that relied on annual appropriation actions by the legislatures of the issuing entities. They were effectively unsecured obligations of these issuers. As the municipalities involved in recent bankruptcies have sought to restructure their finances and associated obligations, they have sought to use this unsecured status as a basis for effectively repudiating the debt.

The successful effort by Detroit to avoid the repayment of much of the principal on its outstanding $1 billion plus of pension obligations is well documented. The most recent example is in San Bernardino where the city has contested its obligations to make payments to both CALPers and to holders of outstanding pension COPs. Last month, CALPers successfully challenged the city’s effort to avoid required contractual payments due to the pension fund. The City contends that it cannot afford both the payments to CALPers and repayment of debt service on its pension COPs. While not yet final, the city’s recovery plan is expected to include sharply reduced principal recoveries for holders of the COPs.

These efforts mirror the treatment of certificate of obligation debt by other issuers in bankruptcy or undertaking restructurings outside of bankruptcy. Given the rather thin case history that existed under Chapter 9 prior to the rash of filings over recent years, the resulting decisions upholding efforts to force debt holders to take significant haircuts has begun to establish a pattern of precedent which is highly unfavorable to bondholders.

We believe that these precedents have created a situation where pension obligation securities should not be a part of an individual’s portfolio at any price. The results of the recent restructurings have created a highly insecure obligation that provides a level of risk which is not offset by any available yield.


Over the years, the CA Public Employees Retirement System has been a leader in the management of state pension funds. Whether it be matters of investments, fund management, corporate governance activism, or non-traditional investing, CALPERS has been a leader. For years, the country’s biggest state pension fund, paid billions of dollars in fees to external managers to help finance the retirement plans of teachers, firefighters, police and other state employees.

Now Calpers, which has just more than $300 billion of assets under management, plans to cut back drastically on those fees by severing its ties with half of the external investment managers of its funds. Calpers will inform its investment board this month about its plans to reduce the number of external managers to 100 from 212. As part of the move, Calpers will reduce the number of private equity firms to 30 from 98, giving those remaining managers $30 billion to manage. Calpers invests in some of the biggest and best known private equity firms in the world, including Blackstone, TPG, Carlyle and Kohlberg Kravis Roberts.

The move follows on last year’s decision to liquidate $4 billion in hedge fund investments in an effort to simplify a portfolio that has become complex and expensive. This year, the fund will begin to make more payments to retirees than it receives from its investments. And by 2030, it could be left with a $10 billion shortfall between payments and the total amount of contributions from active workers and income from investments, Calpers said in a presentation in May.

Last year, it paid $1.6 billion in management fees, $400 million of which were a one-time payment for its real estate managers. Many other pensions funds have begun to focus on fees, too. Despite a bull market for the last several years, many state and municipal pension funds have not received large enough returns on their investments and are now faced with having too few assets to cover future costs. They now need to address issues of earning enough to make up for their failure to earn what they said they would earn in the past, and making enough in this environment to pay for new promises.

The change reflects the fact that taxpayers are increasingly being asked to pay for public pension shortfalls. Many feel that the more that is being paid to the asset managers, the less is available for public services. In Pennsylvania, where the state is looking at a $50 billion hole in its pension fund, Gov. Tom Wolf recently asked  “why are we paying Wall Street managers hundreds of millions of dollars?” In New York City, Comptroller Scott M. Stringer has noted that the city’s five pension funds have paid more than $2 billion in fees over the last decade, outpacing the returns during the same period. “Right now money managers are being paid exorbitant fees even when they fail to meet baseline targets,” Mr. Stringer said in April.

The move towards nontraditional investment strategies gained additional traction in response to the financial crisis, when the value of assets was decimated by losses. It led pension funds to shift more aggressively into private equity and hedge fund strategies. But returns after the fees — which typically follow a “2 and 20” model in which investors pay an annual management fee of 2 percent of assets under management and 20 percent of returns — have been disappointing in more recent years.

CALPERS will also use just 15 of the current 51 real estate managers to invest the fund’s $26 billion real estate portfolio. And Calpers will eliminate 24 managers from its general equities portfolio, leaving 20 firms to invest $24 billion.

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 June 4, 2015

Joseph Krist

Municipal Credit Consultant


Under a 2010 state law, the city’s contribution to its police and fire fighter funds next year increases by $550 million to about $839 million. A bill to restructure contributions in the near term won final legislative approval on Sunday from the Illinois Senate. The bill now awaits the Governor’s signature but earlier in May the Governor said  “For Chicago to get what it wants, Illinois must get what it needs.” As we go to press, the bill is unsigned.

The bill would reduce that amount by about $220 million, to $619 million. Chicago’s payments would increase every year between 2017 and 2020, but not as much as under the 2010 law. After 2020, the city’s contributions would be calculated at amounts that would enable the two pension systems to become 90 percent funded by 2055, which is 15 years longer than in the 2010 law.

If Chicago fails to make required pension payments, the bill allows for an intercept of state funds due the city and for the retirement funds to go to court to force payments. The bill also requires proceeds from a Chicago casino in the future to be allocated to the public safety retirement funds. Emanuel has been asking state lawmakers for a bill authorizing a city-owned casino, but that legislation did not advance.

We have previously documented the Governor’s demands for the enactment of a package of tax changes and regulatory changes considered to be “business friendly”. They are unrelated to the pension problems of either the State or to the City of Chicago. The debate over pensions and the budget have had a decidedly partisan edge with the Governor saying after the end of the legislative session he called “stunningly disappointing, “we’re going to have a rough summer.”


The NBA Finals begin on June 4 and they will command the most attention from pro basketball fans. Many owners however, will also have an eye on developments surrounding the financing for a new arena in Milwaukee for the NBA Bucks. Gov. Scott Walker has finally taken a public stand in support for the major aspects of a plan to publicly fund such an arena.

As currently conceived, taxpayers would be responsible for half the initial cost of a new arena. The initial public investment would be $250 million, but taxes would ultimately pay for principal and interest on a bond issue for that amount, issued by the Wisconsin Center District. The rest of the arena — another $250 million — would be funded by the Bucks owners and former U.S. Sen. Herb Kohl, who used to own the team.

To support the planned municipal debt, lawmakers would have to change state law to extend taxes the district levies that are set to expire in coming years as it pays off the debt. It would extend for years taxes that are set to expire and could result in a boost in the tax on hotel rooms in Milwaukee County. Walker, who is preparing a run for the presidency, argued that potential hike would not be a tax increase because the Wisconsin Center Board already has the ability to raise it. “It’s already within their means, so that’s not a new tax,” Walker told reporters after a groundbreaking for a plant expansion in Portage.

The district operates the Wisconsin Center convention center, Milwaukee Theatre and UW-Milwaukee Panther Arena. In Milwaukee County, it levies three taxes: 3% on car rentals, 2.5% on hotel rooms, and 0.5% on restaurant food and beverage sales. Under current law, the district has the ability to raise the tax on hotel rooms to 3%. (The district also has the ability to raise the rental car tax to 4%, but only if it needs help from the state because its collections of that tax are falling short of the amount needed to pay its debt.)

Like the debate in many other venues over sports arena financing, this one has strong opinions on both sides. Walker claims that a deal for the Bucks is essential because the team will leave if it doesn’t have plans in place for a new arena by 2017. This would have a significant impact on the state budget. Backers hope to insert the plan into the state budget. The Joint Finance Committee is expected to complete its work on the budget by next week and forward it to the Assembly and Senate for final votes. Both houses are controlled by Republicans. Many conservative commentators object to the use of state money for such a project. Having the district raise the tax on hotel rooms to the maximum amount to help pay for a new arena would not constitute a new tax, Walker contended.

Under the plan, the state would be responsible for bonds worth more than $55 million. The state would commit $4 million a year over 20 years, or $80 million total, to cover its shares of principal and interest costs. The Wisconsin Center District would issue $93 million in zero-coupon bonds that could be paid off years from now. Officials have not detailed how much it would cost to pay back those bonds when accounting for interest.

The city would spend $35 million on a new 1,240-vehicle parking structure and provide $12 million in tax incremental financing. In the most unusual feature of the deal, Milwaukee County would “certify” tens of millions of dollars in uncollected county debt. The county, in effect, would then count on the state to recover at least $4 million of that debt a year for 20 years, a total of another $80 million that would then be funneled to the arena project. The state would also pay off the final $20 million owed on the Bradley Center, where the Bucks have played since 1989. That would bring the state’s total commitment to $100 million.


IFM Investors has announced the completion of IFM Global Infrastructure Fund’s previously announced acquisition of 100 percent of the equity in the Indiana Toll Road Concession Company, LLC (ITRCC), which operates the Indiana Toll Road. The final purchase price for the ITRCC was US$5.725 billion, consistent with the purchase price and transaction structure outlined when the planned acquisition was announced.

The ITRCC is required to operate the toll road under a lease agreement that was executed in 2006, giving it the exclusive right to collect toll revenues through the term of the agreement, which has a remaining life of 66 years. The transaction is being financed using a capital structure that includes debt with maturities as long as forty years.

IFM inherits the remaining 66 years of a Concession Lease Agreement between ITRCC and the State of Indiana implemented in 2006 for a 75-year period. ITRCC on Sept. 22, 2014, announced that it had filed Chapter 11 bankruptcy. Nearly all of the $5.72 billion garnered in the toll road’s lease sale will be used to pay off bondholders who owned bonds backing up ITR Concession’s $6 billion debt. Financing for the acquisition came from some 70 U.S. pension funds and represents their first foray into the toll road market.

The jury is still out in terms of the viability of privately operated toll roads. There are numerous examples of such failed financings in the municipal market and many municipal investors remain wary of bonds in that space. A lot of the risk is based on the level of local opposition to these sorts of projects. In North Carolina, anti-toll group wants a judge to proceed with its lawsuit in an attempt to stop the state’s Interstate 77 toll project for which the P3 contract was finalized May 20. A state senator has developed a draft of a bill that would address opposition concerns. The long-shot bill would use money from an upcoming bond package to expand I-77 north of uptown without toll revenue, breaking a that contract between the N.C. Department of Transportation and a private developer to build express toll lanes.

In another sign of problems with P3 transportation projects, the VA DOT has determined in its discretion to terminate the Comprehensive Agreement with U.S. Mobility Partners, LLC (the “Design-Build Contractor”) for the construction of a 55 mile toll facility in southern VA. Boosters said it would spur development, connect military facilities, provide an alternative hurricane escape route and smooth freight shipments to and from the Port of Virginia. Instead, the project ran into environmental hurdles threatening to delay it and substantially raise its costs.

The termination of the Agreement subjects the Bonds to extraordinary redemption from funds derived from termination compensation amounts to be paid by VDOT.  VDOT will determine the portion of the termination compensation amount necessary to redeem the Bonds by or about the June 15, 2015, termination date and that the Bonds could be called for redemption as early as on or about August 1, 2015. There is no certainty that the Bonds will be called for redemption on such date and VDOT’s Notice of Termination could be rescinded, although the Corporation does not believe that rescission is likely based on discussions with VDOT and public statements made by Virginia’s Secretary of Transportation and representatives of the Governor’s Office. $114.87 million of current interest bonds and $116.73 million of capital appreciation bonds were issued for the project in 2012.


We’ve been following fiscal events for the State of Kansas for some time as the Governor undertakes a significant experiment with supply side economic theory, using the state budget as his test case. Legislation in 2012 and 2013 phased in rate reductions on personal income taxes — to 3.9 percent from 6.45 percent on the high end and 2.3 percent from 3.5 percent on the low end — by 2018. The reductions were expected to cost a total of about $7 billion through 2019. They were based on the premise that they would stimulate economic growth. But that growth did not appear, and after repeatedly trimming spending to close shortfalls, legislators find themselves facing a $400 million budget hole for the coming fiscal year.

The situation has become so serious that many of those legislators are considering whether to reverse field by raising taxes. Both houses of the Republican-controlled Legislature are proposing tax increases. The primary driver is negative public reaction to the idea of cutting more expenditures without significantly hurting popular programs, including education.

The debate  now focuses on which taxes to raise. Some believe that income taxes are off limits instead supporting a rise in sales taxes. Others advocate a mixed approach with income taxes on the table. Democrats argue that increasing sales taxes would be another blow to low-income Kansans to the benefit of the business class. Business owners were seen to be beneficiaries of the plan’s signature piece of the law passed in 2012: the elimination of taxes on certain types of small businesses.

To avoid repeal there is a proposal for removing the exemption on nonwage income for small businesses, instead giving them a 1 percent payroll tax credit. This would be accompanied by an increase in the sales tax to 6.5 percent from 6.15 percent on everything except food, which would be taxed at 6 percent. A competing plan would tax the nonwage income on small businesses at 2.7 percent and increase the sales tax to 6.45 percent, but reduce it to 5.9 percent for food.

The debate has been particularly prolonged. The legislative session reached  the 100-day mark over the weekend for just the sixth time in state history. (Sessions are typically limited to 90 days, and each additional day costs around $40,000.) Supporters of the tax cuts are not necessarily willing to concede that the cuts were the reason for the state’s fiscal problems. To meet revenue shortfalls, Gov. Sam Brownback and lawmakers have found themselves repeatedly tinkering with the budget to fill hundreds of millions of dollars in shortfalls. The governor has cut some state agency budgets by 4 percent, reduced contributions to the state pension system and shifted money between state accounts. Lawmakers have rolled back funding for poorer school districts and changed the way they allocate money to schools. They have slowed funding increases for entitlement programs.

One leading legislative proponent said “We hoped they would just be a magic lantern and everybody would react to it,” he said. “But, eh, it’s hard to get a company to uproot their business when they’re established and move to another place just because of this difference in tax policy.” He unwittingly articulated what many studies have shown. Namely that tax policy is but one of many factors that go into a relocation decision and that taxes are often not the major driver. Initial estimates were that the small business tax exemption would affect about 191,000 entities and cost about $160 million. Instead, for the 2013 tax year, 333,000 filers took advantage of the exemption at a cost of $206.8 million, according to the Revenue Department.

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.