Monthly Archives: November 2016

Muni Credit News November 29, 2016

Joseph Krist

Municipal Credit Consultant










The process of reforming and restructuring Puerto Rico’s finances drags on. Transition hearings between the administration of Gov. Alejandro García Padilla and the incoming government of Ricardo Rosselló Nevares began Monday with testimony by the president of the Planning Board, who detailed the challenges the economy of Puerto Rico faces. “The future risks are the price of oil, the perspective of the American economy, the deterioration of the labor market, the continuing population decline, the revenue collection ability we have, the proportion of cash in retirement systems, the loss of liquidity, and the other factor is the interest rate, which quite possibly the Federal Reserve will make a decision on an interest increase Dec. 14,” Planning Board President Luis García Pellatti said.

In testimony before the Transition Committee, the Planning Board president also mentioned that there are currently 137,000 people without jobs, representing a 12% unemployment rate. That number represents people who are currently looking for work. The rate of population decline is about 9%, and according to García Pelatti emigration in Puerto Rico already exceeds the rate of the 1950s, when some 230,000 people left the island.

“The capital improvement program at PREPA [Puerto Rico Electric Power Authority] is of $2 billion and the PRASA’s [Puerto Rico Aqueduct and Sewer Authority] program is $400 million. The actions taken in the economy take 18 months to be reflected. If PREPA starts its capital improvement program, we will see it in 18 months.” Currently, the Planning Board head said, there are 899,000 jobs, and 10,000 jobs have been lost since last year. In 2017, an additional 3,400 jobs are projected to be lost.

Regarding federal funds, García Pelatti indicated that the projection is these remain the same. In 2015, Puerto Rico received $16.314 billion in federal funds and $16.638 billion in 2016. Personal consumption expenditures began to fall in 2014, representing $61.753 billion. In 2015 consumer spending fell to $ 61.911 billion, and the projection is it will fall to $ 61.866 billion in 2016, García Pelatti said.


In an about-face, New Jersey Gov. Chris Christie announced that the income tax reciprocity agreement he had planned to suspend effective January 1 will be retained after finding $200 million in savings from legislation he signed into law Monday designed to help curb public employee healthcare costs. The governor said in September that the state needed to revoke the pact and tax Pennsylvania residents who work in New Jersey because of a $250 million budget shortfall caused by Democratic lawmakers failing to make necessary public employee healthcare insurance cuts. Ending the tax arrangement first implemented in 1977, was estimated to bring $180 million in new revenue to New Jersey while Pennsylvania stood to lose $5 million a year.

Pennsylvania has a flat income tax rate of 3.07% compared with New Jersey’s rates that range from 5.52% to 8.95% for those earning more than $40,000. Pennsylvania residents working in New Jersey have been able to pay the lower income rate from their home state under the tax agreement.

In September, S&P Global Ratings noted that ending tax reciprocity could potentially encourage employers to move from New Jersey to parts of Pennsylvania that have lower tax rates. This would have resulted in a potential minor economic downside for New Jersey and upside for Pennsylvania, according to S&P. New Jersey has incurred 10 credit downgrades since Christie took office in 2010 due mainly to structurally unbalanced budgets and rising unfunded pension liabilities. S&P downgraded New Jersey bonds on Nov. 14.

Christie’s decision also impacts Philadelphia, which faced an estimated $50 million annual loss in revenue had the tax pact ended, according to one estimate. “We’re pleased to see this longstanding agreement will be maintained,” said a Philadelphia City spokesman.


Nassau County legislators met with 2017’s county budget still partially unfunded. County Executive Edward Magana sent legislators a $2.98 billion budget that included $66 million from new $105 administrative fees on all parking and traffic tickets, but Presiding Officer Norma Gonzales refused on Oct. 31 to approve the new fees. Last week, she announced that majority legislators would allow only about $30 million of those fees to be implemented in a current vote, eliminating the fee on parking tickets and cutting it to $55 on traffic tickets.

That plan will replace the needed funds with money from businesses which, under an amnesty deal, would pay only partial fines for not reporting their income and expenses as required by law — a statue that has been challenged in court. Last week, NIFA told legislators in a letter that a budget that relies on this $36 million from the Income and Expense Law would be rejected, sent back for speedy modification, and if acceptable changes aren’t made, will see NIFA cut that $36 million from the spending plan. The money from the $105 fee it replaced can’t be counted on either, because it can be legally challenged on at least two counts:

Administrative fees, by law, are supposed to reflect administrative costs. The $105 charges are clearly meant to fill a revenue hole, not pay for the handling of the tickets themselves. Magana says the money raised will pay for the hiring of almost 250 police officers and civilian employees. And therein lies another legal problem: Using the fee revenue, which should go to the county’s general fund, to pay for new police disenfranchises county residents who live in villages with their own forces.

Nassau’s consistent structural deficit, which generally hovers around $100 million annually, could be eliminated. One newspaper estimates that spending cuts of 1.7 percent annually for two years would do the trick, or spending cuts of 1 percent and property tax increases of 2 percent annually for two years.

As a state control board, NIFA has the power to force the county into a balanced budget. That might not be a bad idea as the legislature is characterized by a notorious lack of backbone in dealing with budgetary matters and County Executive Magana is likely distracted by preparations for his defense against pending corruption charges.


The proposed securitization financing to be paid from the State of Alabama’s share of BP Deepwater Horizon settlement monies piqued our curiosity. We are less concerned with the structural issues of the credit securing the proposed issue. We are more concerned with how the proceeds of the issue would applied. Would they be used for short-term budget relief? Would they be applied to capital needs in lieu of other sources of debt financing? Would they be geographically targeted to correspond more to the areas of the State impacted by the spill? The answers to these questions would reflect either positively or negatively on the State’s credit and financial practices.

We are glad to see that the State’s plan answers these questions in the manner that we see as being most favorable to the State. the fact that the primary use is for transportation capital projects in the southwest of the State is positive. The use of some proceeds to support some operating expenses is at least in departments which would have been related to the spill. The geographical targeting of the capital uses speaks for itself.
So kudos to the State for a wise use of the “windfall” in an era when such common sense use of such funding is fairly uncommon. We don’t see enough of that in these challenging times.

One  another aspect of the deal we see is the use of this money as supporting the trend we saw on election day of support for transportation spending on the sub-federal level during a time of pressure and uncertainty from federal sources.


The MTA in New York is expected to propose a 4 percent increase on fares and tolls across the agency’s network of subways, buses, tunnels and bridges. The new base fare, which may rise to $3 from $2.75, is expected to take effect in March as part of regularly scheduled increases every two years. As part of the debate, a number of politicians and interest groups is proposing funding in the NYC Fiscal Year 2018 Executive Budget to cover the cost of offering half-price Metro Cards to New Yorkers between the ages of 18 and 64 living in households at or below the federal poverty level, about $24,000 for a family of four.  According to a 2016 report by activist groups CSS and The Transit Affordability Crisis, as many as 800,000 New Yorkers would be eligible for reduced fares under this proposal.

Preliminary estimates from The Transit Affordability Crisis find that under this half- fare proposal, the City would have to make up about $200 million in lost fare revenue annually to the MTA. Unfortunately, advocates cannot produce  consistent estimates of the expected revenue loss. Another estimate from The Community Service Society of New York and Riders Alliance found If frequent riders applied for discounted fare cards at rates similar to those at which they seek public benefits like food stamps, about 360,000 people might participate at a cost to the authority of about $194 million a year in lost revenue.

One of those estimates is wrong. We suspect that the revenue loss is higher. What is not in doubt is that the foregone revenue in the lower estimate amounted to 3.3% of 2015 fare box revenues from buses. Not an insignificant amount but not fatal to the credit either. Using the larger of the two possible estimates provided by advocates, the revenue loss could be double that which would more significant. Another way of looking at the proposal is that the lower estimated revenue loss is nearly equal to all of the 2015 MTA bus revenue collected in 2015. It is hard to believe that free bus service in New York City would become a reality.

Cities like San Francisco and Seattle have already adopted low-income reduced fare programs. But fare box revenues comprise a much lower share of operating revenues in those cities and those systems do not have debt outstanding which is secured by pledges of those revenues. From a strictly credit point of view, adoption of the proposal without subsidy from government would be credit negative for MTA debt and would be credit negative for the City if it chose to subsidize the program. The City already subsidizes bus service to the tune of $439 million.


There will be a court hearing on December 1 on a request from five police and firefighters challenging proposed changes in benefits. The changes were proposed after a series of bad investments, primarily in real estate, produced a series of poor investment returns. At an August board meeting, trustees discussed reducing benefits and in September they considered restricting withdrawals from the Deferred Retirement Option Program, where monthly pension checks accumulate interest if police and firefighters chose to work past retirement age.

Concerned, police and firefighters began retiring and pulling money from their DROP accounts. A September letter warned that “our long-term solvency will become much more challenging” if the exit continues. But trustees still heard more than 80 requests to retire in October, compared with a monthly average of 14. Even if benefits are reduced, stabilizing the fund would require $1.1 billion from the city, according to pension officials. The city is understandably reluctant about providing assistance because of the pension’s past investment choices.

It is clear that the blame for the crisis can be spread around and that a somewhat holistic approach to resolving the situation. We see the comments about the potential for bankruptcy by the City as being for political purposes in an effort to lead to state legislative support for changes in pension law. Clearly, this will not be an easy fix and there will be much contention along the way. A downgrade for the City will likely occur as a part of the resolution of this situation.

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 November 22, 2016

Joseph Krist

Municipal Credit Consultant


There has been much speculation about what a Trump administration might mean for municipal bonds – credit, valuation, issuance. Some of it has been informed, much of it misinformed. There really isn’t a municipal bond beat that has a pool of reporters dedicated to covering it at least in terms of the national press. Bylines usually belong to reporters who cover something else primarily. So the speculation isn’t particularly informed, it relies on a small number of sources, and nearly all of what results is agenda driven.

The recent trend of major press stories have revolved around underinvestment. The term “third world airport” is thrown around a lot. You would think that the muni business has been nonexistent. Is there a lot to do? Yes. But just look at the transportation sector. What do the Big Dig, the Bay Bridge replacement, Chicago O’Hare, Miami International, and the three New York metropolitan airports have in common? All have or are undergoing major expansions and improvements to their infrastructures. And yes, municipal bonds were the major source of financing.

So a method of financing infrastructure exists. From this standpoint, we see the will to move forward and actually pay for projects is often the major stumbling block impeding progress.

So should one be optimistic? In the present environment, a number of caveats must be acknowledged. The lack of a government record for the President-elect,  the anti-government rhetoric of the campaign and the support for it by the people who voted for him only muddy the speculative waters. The rather tumultuous impression of the transition and questions about who actually have influence render things even less clear.

Then there is the whole issue of what everyone means when they talk about infrastructure. Is infrastructure meant to mean the end result of a planned, thought out strategy? Is  it a way to implement an industrial policy through some back door? Is it a short term jobs program or is it part of a coordinated program of sustained economic development? Is it just another way to enrich investments in real estate?

Let’s state some obvious points. Infrastructure makes lots of people happy – politicians, voters, suppliers, contractors, construction workers, developers, bankers, businessmen. So if that is true, there shouldn’t even be an issue. Or should there? The recent election did not exactly generate a “profiles in courage” environment regarding taxes and other new revenues. Infrastructure requires funding and that requires revenues – taxes, tolls, fees. And those would be paid by the aforementioned voters, suppliers, contractors, construction workers, developers, bankers, businessmen. So nothing in this debate can be assumed.

And what about the incongruity of the President-elect’s on the record views in opposition to taxes, his belief in the incompetency of government, his belief that infrastructure spending is just another term for income redistribution. This in addition to a Republican House that has shown a clear lack of support for many categories of infrastructure spending especially in the category of transportation.

As for the notion that change in outlook towards regulation – financial, environmental or administrative reflects a stronger outlook for the municipal bond market think about this. Two diametrically opposed administrations both have proposed fiscal policies that would be most negative to our market. The outgoing administration included limits on the value of tax exempt interest as part of its budget proposals. Short of outright elimination, can someone tell me how a cut in the marginal tax rate from 39 to 15% is in any way “muni positive”. So where is the joy coming from. The muni market has already shown its ability to creatively finance a wide range of projects. We’ve seen tax credit bonds, BABs, and other creative responses. But we need buyers to digest the bonds necessary to finance an infrastructure binge.

Which brings us to another aspect of this discussion. In addition to tax cuts, a hawkish view towards deficits will influence policy as well. Fed Chair Yellen will likely be replaced by a deficit hawk. That implies moves to raise rates which will increase the cost of infrastructure spending. Put those factors together and the resulting combination of pressures does not add up to robust support for this type of spending.

And please do not forget how the municipal bond industry fared during the last major effort at tax reform. At the time, tax reform led to a record year of issuance in 1985. What drove that? The proposed  limits on tax exempt issuance that would have taken effect on January 1, 1986 under Representative Al Ullman’s reform proposal. As a result we got AMT bonds, limits on private activity issuance, pressure on issuance spreads and a large scale exodus of dealers from the municipal market. In the ensuing 30 years, the number of regional and boutique houses has continually diminished and the attractiveness of our market as a source of return on equity continually diminishes.

Now the industry faces additional regulatory challenges. The Financial Industry Regulatory Authority (FINRA) said the U.S. Securities and Exchange Commission had approved a plan that would require brokerage firms to disclose how much they mark up the price of most bonds they sell to retail customers. The SEC also approved a similar plan by the Municipal Securities Rulemaking Board.

None of this helps the overall municipal sector. By limiting the ability and flexibility of intermediaries to provide the widest range of options to issuers, we weaken their ability to address their credit challenges. That will be true for traditional governmental credits as well as a number of non-governmental 501c3 credits.

So the view here is that a Trump administration will provide more challenges than many anticipate. We would continue to emphasize credit selection, a reliance on sound fundamental analysis, and a sober assessment of the value of a few basis points relative to the risk offered. These are the characteristics of credit that allow investors to remain calm while the debate goes on and the impact of the give and take of the legislative process unfold.

Strap in!!

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 November 17, 2016

Joseph Krist

Municipal Credit Consultant








Jeffrey Chiesa, a former state attorney general, U.S. senator and close ally of Gov. Chris Christie, will be the man to lead the Atlantic City state takeover. The state named Chiesa as the Local Government Service director’s designee in Atlantic City, where he will have vast powers to fix the city’s dire finances. That authority includes the powers to sell city assets, hire or fire workers and break union contracts, among other powers, for up to five years.

“I am committed to improving essential government and community services for the people of the Atlantic City,” Chiesa said in a statement. “I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.” A Department of Community Affairs statement said the state’s immediate steps include entering into agreements with casinos over payments in lieu of property taxes and ensuring debt, school and county tax payments are made on time. Chiesa also will explore right-sizing the city’s work force and pursue financing to reduce the city’s debt, the statement said.

Frankly we would have been disappointed if anything else had occurred. Chisea said what had to be said to the local populace but to believe that this will be a hugely collaborative process would naive. The populace and the political establishment had their chance and the city must now move forward.

The city has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base plummeted from $20 billion in 2010 to $6 billion today as the casino town faced more competition in neighboring states. Five Atlantic City casinos have closed since 2014.

The city has fought the state since January to maintain local control. Mayor Don Guardian said, “Although we fought very hard to keep our sovereignty and we will continue to review all of our legal options, Sen. Chiesa has a reputation of being fair and a man of integrity. He has served the state of New Jersey honorably and we will continue to work with him and the state to resolve our fiscal challenges.” The DCA statement said the city’s mayor and City Council will maintain “day-to-day municipal functions,” while Chiesa and state officials will implement fiscal-recovery efforts. Earlier Monday, Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

Christie appointed Chiesa to the U.S. Senate in June 2013 after the death of U.S. Sen. Frank Lautenberg. Chiesa served four months in the Senate and declined to run for re-election. Chiesa was New Jersey’s attorney general from January 2012 to June 2013, and was Christie’s chief counsel prior to that appointment. Chiesa also oversaw Christie’s transition team when he was first elected governor. Chiesa rejoined the firm Chiesa Shahinian & Giantomasi PC, formerly Wolff & Samson, in November 2013 after serving in the Senate.

The appointment follows the state Local Finance Board vote to take major decision-making powers away from city officials last week and grant them to Local Government Services Director Timothy Cunningham. “The simple fact is Atlantic City cannot afford to function the way it has in the past,” Chiesa said. “I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

The board’s vote for the takeover came after Community Affairs Commissioner Charles Richman rejected the city’s fiscal-recovery plan last week. The plan included cutting 100 workers, selling Bader Field to the Municipal Utilities Authority, settling with Borgata Hotel Casino & Spa over tax refunds and bonding to pay for tax-appeal debt.

But Richman said the plan failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million and didn’t accurately estimate cost and revenue projections. Richman also raised concerns over the Bader Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.” The city sent the state supplemental information after the plan’s rejection, but the extra details didn’t change Richman’s mind. The plan still had an “over-reliance on state aid,” Richman said. Chisea’s appointment is the culmination of a long signaled and none too subtle process begun by Governor Christie.


The Colorado Department of Transportation announced a new pilot study Thursday that will look into idea of replacing the state’s gas tax with a pay-by-mile charge. It’s called the Colorado’s Road Usage Charge Pilot Research Study. The 4-month study will launch in December, and will look at an approach where drivers would pay a fee for how many miles are traveled per month instead of paying the state’s $.22 per gallon gas tax at the pump.

By the year 2040, Colorado’s population is expected to nearly double to 7.8 million residents, which will result in higher demands for mobility and on the state’s transportation infrastructure, according to CDOT. “We are facing a nearly one billion dollar annual funding gap over the next 25 years,” said CDOT. “And over the past two decades, Colorado’s current gas tax has become less reliable with the spike in more fuel efficient vehicles and hybrids.”

The department said the pilot is just the first step in an extensive process of evaluating the concept alongside other funding alternatives. “What folks at home need to know is if you have a car that gets about 20-25 miles per gallon, you’re probably not going to be paying more– or if you are, it will be about a dollar more– or a dollar less, depending on your driving,” Castle said. “For people with less gas mileage than that, they’re probably going to see money coming back. and then for the cars that are very fuel efficient—hybrids, or electrics cars– they are going to be paying.”

Some of the research topics in this study include mileage reporting technologies as well as a manual reporting option; how these technologies work in Colorado’s environment and the difference in driving habits between urban and rural drivers.

“A healthy transportation system is the backbone of our state’s economy and way of life.” CDOT Executive Director Shailen Bhatt said. “As the state’s transportation funding gap under the current gas tax grows, we need to explore possible funding opportunities, such as road using charging, to ensure Coloradans the mobility they need to live, work, and play. The pilot study will begin in December and will end in spring 2017.


Through a settlement, attorneys for the SEC secured an injunction and a $1 million civil penalty against the city government last month after a federal jury ruled that Miami officials illegally hid huge budget imbalances from bond investors in the late 2000s. Now, the SEC is seeking an injunction and a $450,000 fine against Michael Boudreaux, the city’s former finance director whom the agency accused of masterminding Miami’s financial “shell games.”

In a filing dated Oct. 28, attorneys for the SEC argued that the court ought to issue its most severe, “third-tier” penalty against Boudreaux by fining him $150,000 for each of the three 2009 bond issues at question in the civil case. In making the plea to the U.S. District Court, the SEC attorney stated that court testimony shows Boudreaux’s current salary as a business manager for the Lafon Nursing Facility of the Holy Family in New Orleans is somewhere around $150,000. “Imposing a third-tier penalty for each of the three bond offerings, for a total penalty of $450,000, would serve the need to both punish Boudreaux and others,” she wrote.

Boudreaux’s attorney, countered that his client is a “man of modest means,” and the proposed fine as “egregious.” “The City of Miami’s nearly $1 billion budget is scarcely impacted by its settlement. Yet for Mr. Boudreaux, the SEC’s requested penalty exceeds the bounds of fairness and justice.” “Mr. Boudreaux calls upon the SEC to abandon its efforts to bring him to personal ruin for City decisions that did not enrich him, did not result in any actual loss to any person or institution, and did not create a significant risk of substantial losses to anyone.”

Boudreaux “will continue to fight for his vindication.” The jury found Boudreaux liable on one count of violating the Securities Act and two counts of the Exchange Act. The jury found him not liable on a fourth count.


The Padilla administration will not go quietly into the good night regarding the island’s debt. Puerto Rico’s government warned in a liquidity report made public on Wednesday that it will run out of money in less than three months as part of the push to obtain permission to restructure nearly $70 billion in public debt. The report highlights that the island faces a $1.3 billion debt payment in February, when a temporary debt moratorium imposed this year by the U.S. government expires. Another $934 million in bond payments is due from March through June.

That would add to what Puerto Rico has already defaulted on (nearly $1.4 billion worth of bond payments since August 2015), angering creditors who have filed multiple lawsuits and accuse the government of exaggerating its situation. Padilla administration officials warned that if the moratorium is not extended, the island will run out of cash to provide essential services. The report also warned that the island’s pension system, which is underfunded by more than $40 billion, will run out of cash in 2018 unless the government takes steps such as increasing contributions.

Clearly intending to influence events, the government released the report two days before a federal control board charged with overseeing the island’s finances meets in Puerto Rico for the first time. Additional details released state that the local government is creating a registry of all those who own Puerto Rico bonds, identifying so far 350,000 owners that hold 68 percent of the island’s debt. At least $6 billion of that debt is held by Puerto Rico residents.

Gov. Alejandro Garcia Padilla has been urging the board to authorize a debt restructuring so Puerto Rico can re-enter the markets and pull itself out from a decade-long economic crisis that is only deepening. His administration has declared a state of emergency at several government agencies and implemented austerity measures including deferring payments to the island’s police and agriculture departments, among others.

The report was released on the same day that Ricardo Rossello, Puerto Rico’s governor-elect, met with bondholders and credit rating agencies in New York. Puerto Rico bonds rallied after voters last week chose Rossello as their new governor. He has said his main priority is to make Puerto Rico the 51st state.

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 November 15, 2016

Joseph Krist

Municipal Credit Consultant








A number of states are or have been coming to market which means that relatively fresh data (as much as that means in the land of municipals) on pension funding has been available. So we take this opportunity to review that data.

West Virginia – Data is through FY 2015. It has paid 100% of its ARC for its Public Employee and Teacher Pension Funds in each of the last two fiscal years. Its contributions as a percentage of employee payroll are 14% and 2% respectively. The State reports the Public Employees Fund to be 93% funded while the Teachers Fund is only 65% funded. The State is still using a 7.5% assumed investment return to determine its unfunded liability.

New Hampshire – The Granite State enacted a series of reforms in 2012. these included increases in the retirement ages for teachers (60 to 65) and police and fire (45 with 20 years service to 50 with 25 years service). It has met 100% of its ARC requirements since fiscal 2010. The State also reduced is investment return assumption from 7.75% to 7.25%. The funding ratio however is a low 59%. That is a decrease from 67% over eight years.

Mississippi – The State still uses a generous 7.75% assumed rate of return on investment. The funding ratio is at 60% for the primary public employee fund. This despite steady increases in the employer contribution rate and a 2011 increase in the employee contribution rate. The goal is for the State to reach a funding level of 90% by 2042. For the public safety employee fund, the funding ratio is lower at 58%. Ironically, the State Legislators fund has the best funding ratio at 78%.

Illinois – We start with the fact that pension bond debt service currently at $574 million and steadily increases annually to a 2033 level of $1.156 billion. In addition the State issued pension bonds in 2010 and 2011. The use of pension bonds allowed the State to significantly reduce current contributions to the funds. However, the State continued to make less than the actuarially required contribution in each of the last ten years. As the result of inadequate payments and below assumption investment returns, the State estimates that its unfunded pension liability increased in fiscal 2016 from $111 billion to $129 billion. That results in a funding ratio of 37% down from 41%.


Voters in Boulder, Colorado and three cities in California — San Francisco, Oakland, and Albany — approved controversial new soda taxes on Novemer 8. Sugar-sweetened beverages have been linked to obesity and diabetes, and these new laws are intended to fight back  the world. At least that is the pitch that made to voters to get these initiatives approved.

In the Bay area the new laws will levy a one cent-per-ounce tax on beverages that contain an added-calorie sweetener and more than 25 calories in 12 ounces of liquid. This includes sodas, energy drinks, sweetened tea, and sports drinks. In Boulder, the tax is even steeper: two cents per ounce for beverages with at least five grams of an added-calorie sweetener in 12 fluid ounces.

Shoppers won’t be paying these taxes at the checkout registers — at least, not directly. Instead, the taxes are directed at beverage distributors, who are anticipated to increase prices for retailers and shoppers. If they do, it “could result in a price increase of 67 cents on a two-liter bottle, or $1.44 for a 12-pack,The New York Times estimates. But it’s possible that less than half of that price increase will be passed on to shoppers, according to at least one recent analysis. That means that soda taxes might actually need to be higher than a penny per ounce before we start seeing large changes in consumers’ behavior.

The reality is that this not a major credit issue given the amounts of money which will be generated. The taxes are projected to raise $15 million for San Francisco in the 2017–2018 financial year, $6 million per year in Oakland, and $223,000 annually in Albany. Nonetheless, this has been an expensive fight for those on both sides, and one with especially high stakes for the soda industry, which is facing a 30-year low in soft drink consumption in the US. Although unsuccessful with his own effort during his administration, New York’s Michael Bloomberg poured millions into the pro-tax campaigns, and the American Beverage Association spent millions against them.

Berkeley was the first in the US to pass a soda tax in 2014, the same year that a similar measure failed in San Francisco. Philadelphia followed earlier this year. The American Beverage Association is suing to stop that measure from taking effect It is currently planned for January 1st, 2017.

We do not see these first successful efforts to begin these taxes as credit significant in that they are not meant to raise significant revenues or if they do are tied to new classes of expense. If they have credit impact it will be long term by changing health-related public conduct that could slow growth in health-related expenses.


Gov. Alejandro García Padilla said Wednesday he has been in communication with the fiscal board created by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) while the entity evaluates the draft fiscal plan he and his economic team presented more than two weeks ago. Regarding the process, he said it could be slow due to how “voluminous and technical” the document is, whose numbers “require a lot of analysis.” However, he indicated he hopes that the Board conducts its analysis, it will conclude Puerto Rico’s debt, estimated at $70 billion, is unpayable and thus requires restructuring.

What seems to be the case is that the outgoing Governor seems to be intent on doing what he can to undermine the restructuring process. The governor recommended the seven board members to watch out for their “credibility and legitimacy” when carrying out designations or awarding contracts to consulting companies, in cases where these are associated to any local politician.The governor was reacting to the contract the board granted Forculus Strategic Communications, owned by Francisco Cimadevilla, who worked with former Gov. Luis Fortuño 20 years ago at the Economic Development & Commerce Department and obtained contracts with La Fortaleza and the Government Development Bank (GDB) during Fortuño’s administration, between 2009-2012.

Two board members, its president, José Carrión, and former GDB President Carlos García, also worked close to Fortuño during his administration, which has raised questions among some about the former governor’s influence on the entity that will rule Puerto Rico’s finances for the following five years, minimum. Carrión is also brother-in-law of Resident Commissioner Pedro Pierluisi.


The Atlanta Hawks announced a $192.5 million renovation of Philips Arena, with the city providing the bulk of the funding. The Hawks agreed to an 18-year lease extension to remain at the city-owned arena through 2046. The city will contribute $142.5 million toward the project, which will most noticeably alter the look of the luxury boxes stacked on one side of the arena. There will be new amenities, a variety of different-size suites, improved sightlines for basketball, a state-of-the-art video system, and connected concourses throughout the 17-year-old facility.

Philips Arena originally was built to host both the NBA’s Hawks and the NHL’s Atlanta Thrashers. The hockey team moved to Winnipeg in 2011.

Mayor Kasim Reed had pledged to contribute to an arena renovation when the Hawks were in the process of being sold by former controlling owner Bruce Levenson, who gave up the team after revealing that he sent a racially insensitive email. Tony Ressler lead a group that purchased the Hawks and operating rights to the arena. He said all along that he preferred to remain downtown rather than pursue a new facility, as long as Philips Arena was upgraded.

The Hawks argued that a key part of producing a winning team, providing a superior fan experience and being a civic asset to the city of Atlanta required a renovation of the arena and a meaningful improvement to the downtown area of this city.

Reed said the renovation was part of a long-range plan to transform an unsightly tract of downtown adjacent to the arena and the new $1.4 billion Mercedes-Benz Stadium, a retractable-roof facility set to open next year as home to the NFL Falcons and a Major League Soccer expansion team, Atlanta United.

There have been talks about turning the area, known as “the gulch,” into a mixed-used development much like the highly successful LA Live complex next to Staples Center in Los Angeles. Reed said it’s part of a plan to connect the sports venues to popular tourist attractions around Centennial Olympic Park, as well as to one of the city’s biggest development flops, Underground Atlanta.

“This is the first stake in the ground in transforming the critical corridor,” Reed said. It’s another huge commitment by the city to a sports venue, though Reed stressed that no money from the city’s general fund will be used and no new taxes will be needed.

About $110 million will come from extension of car-rental tax and the city will contribute $12.5 million from the sale of Turner Field to Georgia State University and a development company, a deal expected to close by the end of the year. The remaining $20 million from the city will come from a series of expected future land sales, the mayor added during a City Hall announcement.

The renovation of Philips Arena comes on the heels of the city agreeing to spend at least $200 million — and perhaps much more, some critics have argued — for the Falcons’ new stadium, which will replace the 24-year-old Georgia Dome.

The renovations on Philips Arena will begin next summer and should be completed by the start of the 2018-19 season. The Hawks will continue to play at the arena during the overhaul, with much of the work being done over the next two offseasons.

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 November 10, 2016

Joseph Krist

Municipal Credit Consultant











Much of President elect Trump’s program for funding infrastructure mentions using tax credits as an incentive to generate funding. In the municipal bond universe prior attempts to generate demand for these issues had limited appeal. To refresh, tax credit bonds are taxable debt instruments that are issued by state and local governments as well as governmental entities for a broad range of financing needs.

Unlike tax exempt bonds, tax credit bonds allow investors to receive a tax credit at a rate set by the U.S. Department of Treasury on their federal tax return. The issuer of the tax credit bond retains the responsibility to pay the principal on the bonds. Congress generally allocates specific amounts of funds to be used for each tax credit bond program. The formula for these allocations is generally set by the U.S. Department of Treasury.

In 2008, the Congress amended the tax credit bond rules to permit tax credits to be sold separately from the referenced bond (or “stripping” the tax credit) in an effort to attract more investors to these bonds. In 2009 and 2010, the Congress substantially increased the size of many of these programs to aid in economic recovery. those changes reflected the fact that the market which emerged for these bonds was limited.

Should the Trump proposed changes in income tax rates be adopted, municipal bonds would become much less attractive to own. So Muni Credit News approaches the reality of a Trump administration with some trepidation as it applies to municipal bonds.

One immediate area of credit concern would be the impact of a withdrawal from NAFTA on transportation projects which have been undertaken to satisfy commercial traffic needs which are or have been assumed to occur through increased trade with Mexico. These include bridges at the border as well as expansions of existing north-south interstates as well as new road construction often financed by tolls.


In Illinois, Amendment 1 required all state money derived from transportation be spent only on other transportation related projects. It passed with 79% of the vote.

Washington – Measure 732 to impose a carbon emission tax on fossil fuels, reduce sales taxes 1% and increase a low-income exemption, and reduces certain manufacturing taxes was defeated with 59% of the vote.

Metropolitan Seattle (Sound Transit 3) – (see October 27 MCN) is expected to pass.

Austin – $720 million in General Obligation bonds to fund transportation and mobility improvements passed with 59% of the vote.

Los Angeles – Measure M, which would fund the most ambitious transit expansion in Los Angeles County history, amassed support from 69.82% of voters, with all precincts reporting. That’s more than the 66.67% requirement to approve the sales tax increase to fund $120 billion in transit improvements over the next four decades, which would in part fund a large expansion of the system’s rail network.

California – Voters defeated Proposition 53 which would have required statewide voter approval for bond issues over $2 billion. It was a close vote at 51-49% against. While general, the proposition was really targeted at only one or two water projects opposed by agricultural interests. Proposition 55 extending the income tax on earnings over $250,000 to fund schools and healthcare passed with 62%. Proposition 56 to increase taxes on tobacco and e-cigarettes to increase funding for health care for low-income Californians was approved with 63%.

Colorado – Amendment 69 to create the “ColoradoCare” system to provide universal healthcare to Colorado residents via increased taxes was overwhelmingly defeated. Amendment 72 increasing tobacco taxes, with money going to various health programs was also defeated.

Florida – Amendment 3 providing a tax exemption for totally and partially disabled first-responders and Amendment 5 providing a tax exemption for low-income, senior, and long-term residents were both overwhelmingly approved.

Hawaii – Amendment 2 allowing the legislature to use excess general funds to either service general obligation bond debt or post-employment benefits for state employees was approved.

Louisiana – Amendment 3 making federal income taxes no longer deductible from state corporate income taxes was defeated. This is credit negative for the state.

Missouri – Voters defeated two cigarette tax increases and approved Amendment 4 to prohibit new sales/use taxes on any service or transaction that was not subject to a similar tax as of Jan 1, 2015.

Oklahoma – Voters defeated Question 779 to increases the state sales and use tax by 1% per dollar to increase funds for public education.

The main takeaway: anti-tax sentiment remains strong in general but detailed transportation projects funded by dedicated protected revenues can and did attract fairly widespread support.


We address the results of Tuesday’s election in New Jersey separately from those in the other states because of our particular concern about the state’s fiscal outlook. New Jersey voters refused a plan to build two new casinos in northern New Jersey so there won’t be any revenue going to the state from there. Not that they would have been necessarily successful. Gaming seems to have become a zero sum game. They approved an initiative to limit the use of the newly raised gasoline tax (the 23 cent increase) to transportation uses only. Good for a state whose overall transportation system has become quite problematic.

The problem is that the increase was part of a package that reduced the general retail sales tax rate in the State so now the General Fund will have less revenue to fund things like rising pension expenses. All in all a negative day for the State’s credit.


Voters in San Diego County defeated a referendum that would have provided hundreds of millions of tax dollars toward a stadium the team wanted to build in downtown San Diego. The Chargers must now choose between  whether to pay for the stadium themselves, look for an alternative site elsewhere in the city for a stadium, or move to Los Angeles, where they have an option to move into a stadium being built by  the owner of the Rams. The Chargers have several years left on their lease at Qualcomm Stadium and have until the second week of January to exercise that last option.

If the team’s owner, Dean A. Spanos, decides not to move the Chargers to Los Angeles, the Oakland Raiders will then be given the option to join hands with the Rams. In the meantime, the Oakland Raiders  may apply to move to Las Vegas. Lawmakers in Nevada last month agreed to increase a hotel bed tax in Clark County to raise $750 million for a stadium the team and the casino magnate Sheldon Adelson want to build. (See MCN 9/20/2016)

Charger ownership said it will diligently explore and weigh its options, and do what is needed to maintain its options, but no decision will be announced until after the football season concludes, and no decision will be made in haste. The Rams had no comment on the result of the vote in San Diego.

The Chargers have tried for a long time to get the public to share the cost of a new stadium to replace Qualcomm Stadium. It opened in 1967 and is one of the oldest in the N.F.L. Last year, the team rejected a plan championed by the mayor and a committee that included building a new stadium on the property where Qualcomm Stadium sits in the Mission Valley neighborhood. Instead, the Chargers focused on moving to Carson, Calif., south of Los Angeles, and building a privately funded stadium with the Raiders. In January, the N.F.L. owners voted instead to let the Rams move to Los Angeles, and gave the Chargers the option to join them.

The Chargers then came up with a proposal to build a downtown stadium on a tight plot near the city’s convention center. The team wanted voters to raise the county’s hotel bed tax, which it portrayed as a levy on tourists. Many of the city’s hoteliers opposed the increase because they said it would drive up room rates, making San Diego a less affordable city to visit.

The mayor eventually backed the team’s proposal. The Chargers faced a  threshold for approval of such increases is a supermajority of two-thirds of the vote. The Chargers contended that only a simple majority was needed, but a lower court judge rejected that interpretation.


Voters in Arlington, Tex., approved, by 60 percent to 40 percent, a proposal providing up to $500 million in public financing for a new stadium with a retractable roof.


Moody’s reiterated its negative outlook and S&P assigned a new negative outlook for the City of Philadelphia’s GO credit in connection with an upcoming sale  next week of  $282,905,000. The negative outlook reflects the city’s inability to achieve structural balance resulting in a continued weakening of reserve levels. While the city conservatively budgets and revenues have been on an upward trend, expenditures continue to outpace revenue growth. As a result, additional reserve declines are projected through fiscal 2018, ending with a General Fund balance of just over 1% of revenues, well below that of like-rated peers. Going forward, any additional declines in reserves beyond current projections, will result in negative credit pressure.


New Jersey’s Local Finance Board voted 5-0 Wednesday to grant its director, Timothy Cunningham, far-reaching governing powers over the city. The vote, a by-product of the state’s Municipal Stabilization and Recovery Act, was the worst-case scenario for the city’s mayor, Don Guardian, who called the decision “devastating.” Cunningham recused himself for the vote because of the powers the takeover gives him to handle day-to-day operations. Cunningham is also the director of Division of Local Government Services, part of the state’s Department of Community Affairs.

He declined to give specifics of how he would proceed, or how far he would exercise the powers the state board had just granted him. The law gives the state up to five years to oversee Atlantic City, giving Trenton the power to hire and fire, sell off assets, veto council minutes, eliminate departments and nullify union contracts. The Local Finance Board specifically excluded the power to declare bankruptcy from their resolution placing power into the state’s hands.

Prior to voting on the takeover, the Board approved Atlantic City’s 2016 budget, first increasing the tax rate, which Cunningham paradoxically said would result in a decrease of about $13 per typical household. He did not explain how an increase in the tax rate would lead to a decrease in actual taxes paid. City Solicitor Anthony Swan said the vote was “historic in nature” and cautioned against consolidating powers of the legislative and executive branch in one person, thereby disenfranchising the city’s residents. He said city residents and employees are “frightened to death” of the state coming in and doing things like nullifying union contracts.

After meeting privately with Cunningham, Mayor Guardian said the city was told to continue operating “business as usual.” He said it still was not clear how far the state intended to go in usurping their control of day to day operations. Guardian and City Council President Marty Small said they would defer any decision on whether to appeal the takeover to court to see how it first played out. Cunningham said his preference would be to work with council before figuring out other methods of  “operationalizaing” the state’s powers. He declined to say whether the state had a plan of action ready to go, but said, “We’ll be prepared to take the mission that’s assigned to us.”

Earlier this month, the state of New Jersey rejected Atlantic City’s recovery plan, saying it was not likely to achieve financial stability for the resort city, triggering an imminent state takeover. The city has promised to fight any takeover in court, which the state law allows them to do. They have also said that they would fight a takeover on civil rights grounds, and said they had the support of groups such as the ACLU, the NAACP, and the U.S. Conference of Mayors.


The Education Achievement Authority has agreed to return to the Detroit Public Schools Community District some 14 schools in June, authorities announced, along with a plan to repay millions the authority owes the district. There are about 5,500 students attending the 11 schools and another 1,000 enrolled in three charter schools, If most of the students at the EAA schools return to the Detroit public schools, it could mean millions more in state funding for a district that has been hemorrhaging money and thousands of students for years.

The EAA will pay the Detroit district $2.25 million in debt, according to Emergency Manager Steven Rhodes making the payments in monthly installments from its budget, which began in July and will end in August. EAA will pay nearly $1.4 million in rent on buildings for this school year, plus $831,000 for services such as security and information technology. The first payment was for $200,000 and the final payment will be just over $346,000.

EAA has made $9 million in improvements to the buildings and facilities it inherited from DPS when the EAA was formed four years ago as a way to turn around failing schools. Rhodes said the debt owed the district includes rentals of buildings — which will return to the Detroit school district — that have received “extraordinary improvements” from the EAA including infrastructure and technology upgrades.

The agreement comes after the Detroit school district was given a fresh start by the state when the Legislature passed a package of bills that created a new, virtually debt-free district. As a result, the per-pupil allowance of $7,552 is being used for resources the district says directly impact classroom instruction. The accumulated hundreds of millions in debt from the old Detroit Public Schools district to be paid off using state aid and property tax.

Together, the DPSCD and EAA serve more than 50,000 students, and deliver instruction in more than 100 facilities. The Detroit district expects its enrollment to be just over 45,500 students this school year. The EAA began operating in the fall of 2012 with 15 former Detroit public schools. It has been characterized by financial scandal, poor academic performance and even worse public perception — will try to conduct business as usual in a lame-duck school year.

Governor Rick Snyder had hoped to expand the state-run district beyond Detroit, but he faced resistance from legislators, teachers’ unions and faculty at Eastern Michigan University. The EMU Board of Regents voted in February this year to end its interlocal agreement with the EAA, effective June 30, 2017.

See the 8/23/2016 MCN for a full discussion of charter school risk.


“In the renegotiation, everything is on the table…. Let’s sit with [creditors] under Puerto Rico’s real situation and present them with a plan that will benefit the people of Puerto Rico and, of course, guarantee them some return on their investment. Yes, we have said there is a potential of deferring [debt] payments, of cuts to principal; these are things that are going to be renegotiated, but only with transparency and clarity.”

And so the long slog begins in Puerto Rico. Promises of haircuts while at the same time pursuing statehood, the mind reels. Governor-elect Ricardo Rosselló Nevares committed himself to fight for Puerto Rico’s admission as a state of the United States, as well as taking the island out of the economic crisis it is currently going through, after a decade in recession.

Rosselló said he will negotiate transparently with the island’s creditors, adding that he will meet them at a conference on the island during his administration’s first 100 days. So it could be almost five months more before the real work begins to address the debt.

As for statehood, Rossello wants to follow what is known historically as the Tennessee Plan. In 1796, residents in the territory which became Tennessee held a vote and 73% of the people voted for immediate statehood. The Governor and the local legislature held a convention to establish a constitutional government — not as a territorial government but for government as a State of the Union. The convention approved a state constitution, declared the end of territorial government on March 28, 1796, and said Tennessee would become a State on that same day.

The legislature also established two Congressional districts, authorized four presidential electors, sponsored elections for two members of the U.S. House, and elected two Senators. The U.S. Senate opposed admission The Tennessee Senators went to the Senate and demanded their seats, but the Senate refused.

The House supported admission, though. On June 1, 1796, Congress yielded and passed an admission act allowing Tennessee one seat in the House until the next census. They also insisted on new elections, since the citizens of a territory did not have the  power to elect members of Congress.  Only citizens of a state can do that. Tennessee had declared itself a state, but only Congress can do that.

Tennessee accepted the compromise and became a state just a few months after they said they would. Until that time, territories had asked for statehood and then waited for Congress to declare them states. Tennessee’s bold move essentially meant that they decided they were a state, declared themselves a state, and persuaded Congress to agree. This approach has been called “the Tennessee Plan.”

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 November 8, 2016

Joseph Krist

Municipal Credit Consultant









Audit Update -Alejandro García Padilla’s administration recently finalized the hiring of KPMG, which once again will be in charge of the external audit of the Puerto Rico government’s financial statements for fiscal year 2015. The contract runs until June 2017. KPMG is also auditing the Employees Retirement Systems ($425,000) and the Government Development Bank ($1.35 million), both set to expire next summer. The goal is to release “before the end of the first quarter of 2017” the government’s comprehensive annual financial report (CAFR) for fiscal 2015. This would mark a 10-month delay since its due date, or May 2016.

Of the 70 entities which make up the government’s financial report , 58 have completed their audit processes, yet the retirement systems, the Government Development Bank (GDB) and the Electric Power Authority have yet to finalize theirs. It is not yet known whether KPMG will be the firm in charge of fiscal 2016 audited statements. The administration’s initial plan was to have KPMG jointly conduct the audit of fiscal years 2015 and 2016, and thus deliver a consolidated CAFR. The Puerto Rico government unveiled July 1 its audited financial statements for fiscal 2014.

Litigation Status – The Puerto Rico Financial Oversight & Management Board asked U.S. District Court Judge Francisco Besosa to reconsider his ruling in which he denies the panel’s request to intervene in three consolidated cases whose plaintiffs are seeking a lift of Promesa’s stay on liability claims. Besosa denied the board’s motions to intervene, contending that it failed to comply with Federal Rules of Civil Procedure because it didn’t attach to its motion a pleading addressing the substantive merits of its petition.

Control Board – Just before midnight Monday, Oct. 31, the Puerto Rico government submitted documentation on seven of the nine information requests made by Promesa’s fiscal control board, Secretary of State and Financial Advisory & Fiscal Agency Authority.  The board received annual and monthly information on the government’s cash flow, and its projections until the fiscal year’s end; a report on monthly payroll expenses; a report on the monthly receipt and disbursement of federal funds; a report on annual and monthly compliance with the approved budget; monthly and annual information on revenues and Treasury Department’s measures to increase these; and details about the commonwealth’s debt service obligations for the current fiscal year. Quarterly reports on productivity and performance in the commonwealth’s public entities, and macroeconomic statistics of Puerto Rico weren’t submitted.


The state of Kansas in October again missed its revenue target by $12.7 million. During October, the state collected $10.7 million less in retail sales tax and $7.8 million less in corporate income tax than anticipated. The state treasury surpassed monthly projections on individual income tax by reaping an extra $9.3 million.

Kansas’ cumulative revenue shortfall surpassed $80 million. Overall for the fiscal year, Kansas revenue is more than 4 percent below the level predicted by a panel comprised of Brownback administration officials, legislative staff and university economists. Absent a decisive economic turnaround in Kansas, Brownback would be required to submit a sharply revised budget for the current year and outline for House and Senate members a difficult path to a balanced budget in the upcoming fiscal year.

“If the next two quarters are that bad, you’re talking $240 million in this fiscal year. That would be a worst-case scenario,” said the Senate Minority Leader. State sales tax revenue was $45 million below the projection. The statewide sales tax was raised from 6.15 percent to 6.5 percent in 2015 to help close a projected budget deficit. State tax collections have fallen short 33 of the 46 months since Brownback and the Republican-led Legislature agreed in 2012 to reduce individual income tax rates and exempt more than 330,000 business owners from the state income tax. The energy and agriculture economy in Kansas remained in a tailspin. Robust economic activity in Johnson County and a few other locales can’t compensate for weight of low oil and commodity prices.

Overall, Kansas generated $447 million in total taxes for the month. Total tax collections have exceeded the previous fiscal year to date by $6.8 million, or 0.4 percent. The treasury couldn’t match projections that Kansas would bank $80.4 million, or 4.2 percent, more from July through October.

The state Revenue Department pointed to a September analysis by the Rockefeller Institute of Government that state tax revenue growth had slowed in the first half of 2016. The institute said U.S. corporate income taxes declined 4.5 percent nationally as sales tax revenue slowed.  Kansas ranked rock-bottom in the three-month change in economic growth metrics from July through September, with a decline of 1.18%. Indeed, it was one of only eight states that showed any decline. The U.S. average gained 0.64%.


Elizabeth River Crossings (ERC) is sponsored by two infrastructure development and management firms—Skanska Infrastructure Development and Macquarie Infrastructure and Real Assets (MIRA). The project comprised the development, design, construction, finance and operation of a new two-lane tunnel adjacent to the existing Midtown Tunnel under the Elizabeth River, maintenance and safety improvements to the existing Midtown and Downtown tunnels, extending the MLK from London Boulevard to Interstate 264, and interchange modifications at Brambleton Avenue and Hampton Boulevard. The Project is located between the cities of Portsmouth and Norfolk in Hampton Roads. Under a comprehensive agreement VDOT  maintained ownership of the infrastructure and oversee ERC‘s activities. ERC financed, and built the facilities, then operates and will maintain them for a 58-year concession period.
Unique to this project was the recent announcement  that Norfolk and Portsmouth residents will soon receive help paying tolls through the Elizabeth River Tunnels. Toll Relief, the first program of its kind in the nation, will provide financial relief to qualified Norfolk and Portsmouth residents who travel the Elizabeth River Tunnels.

To qualify for Toll Relief, participants must: Reside in Norfolk or Portsmouth; Earn $30,000 or less per year; Have or obtain a Virginia E-ZPass transponder and registered account; Record eight trips or more during a calendar month through the Downtown or Midtown tunnels. Once a qualified participant’s Virginia E-ZPass transponder has recorded eight trips or more through the Downtown or Midtown tunnels during a calendar month, a $0.75 per trip refund will be credited to his or her Virginia E-ZPass account.

Toll Relief is a 10-year program. The first year of the program will serve as a pilot. Data collected will help determine if adjustments to implementation are needed.

On another front in Virginia, Gov. Terry McAuliffe announced that the state will sign a 50-year deal with I-66 Express Mobility Partners to build and operate toll lanes from the Beltway to Gainesville. The deal is separate from a plan to add rush hour tolls along I-66 east of the Beltway. Cintra, Meridam, Ferrovial and Allan Myers teamed up to submit the selected bid. Ferrovial, which owns Cintra, is a Spanish company that has been involved in a series of similar toll road deals elsewhere in the country, which have an admittedly mixed operating record.

The firms have pledged to spend $800 million on transit projects over the next 50 years. They plan to spend another $350 million to improve mobility through the 66 corridor. The firms will be responsible for all upfront costs and all maintenance of the lanes. “And just for icing on the cake, on top of all of that, Express Mobility Partners will write the Commonwealth of Virginia a check for $500 million that we’ll receive early next year,” McAuliffe said. He called the deal a model for other states considering similar projects.

“Tolling revenue is very important. It is also very lucrative,” McAuliffe said. “If we are going to give tolling revenue away, we’re going to negotiate a very, very tough deal.” Under the terms, two express lanes would be built in each direction. The lanes will operate similarly to express lanes that run along Interstates 495 and 95 in Virginia. Construction is expected to begin next year and the lanes should open to traffic in 2022.

Like other express lanes elsewhere in the region, cars with three or more occupants and an E-ZPass Flex in HOV mode will travel for free. Cars with one or two people will pay a toll that adjusts based on the number of vehicles using the lanes. A higher toll is meant to discourage drivers from using the lanes in order to keep traffic moving. Lower tolls at times when there are fewer cars in the lanes are meant to attract drivers to the lanes. This deal is separate but related to plans to toll solo drivers during the rush hour on I-66 east of the Beltway. Tolls are set to begin in mid to late 2017 for drivers traveling east in the morning and west in the afternoon.

Virginia plans to raise the HOV requirement from two to three people once the express lanes west of the Beltway open, expected in 2021. The proposed agreement states that changes to HOV rules inside the Beltway that would lower the number of passengers required to qualify as a high occupancy vehicle or that would reduce the length of the tolling periods would likely result in a payment from the state to the companies operating the toll lanes outside the Beltway.

With no upfront state funding needed, $300 million in state road funds that had been allocated for the express lanes project would be available for other projects.


All Aboard Florida last week asked for — and on Thursday was granted — an extra month to respond to the counties’ most recent filing. Martin and Indian River in that filing asked the court to block All Aboard Florida’s access to the $1.75 billion of tax-free bonds it was issued last year. All Aboard Florida needed extra time to respond because it is contemplating a plan that would substitute a $600 million debt issue for the first phase of construction in place of the original bond plan which is being challenged.

The U.S. Department of Transportation — according to All Aboard Florida – would provide preliminary approval for the bonds — at a Nov. 16 meeting. If the bonds are approved, the counties’ case would be moot, All Aboard Florida contends in court documents. The counties replied that All Aboard Florida’s financing plan is an attempt to

Our experience tells us that when a speculative project like this so desperately clings to tax exempt financing, that the economics of the project are marginal at best. This reflects the fact that if a project has any real viability in a wider range of financing environments, that there would not be such desperation in the effort to secure the cheapest financing. All in all, the warning signs are as clear as the gates being lowered, the red lights flashing, and the bells ringing at this railroad investment crossing.


Bernie Sanders may not be on the ballot but one of his big issues is, at least in Colorado. Voters will be asked to approve Amendment 69 which would establish what would effectively be Medicare for all in the Centennial State. The Colorado Foundation for Universal Health Care published an Economic Analysis of the ColoradoCare Proposal with projections for 2019 and compares Coloradans’ expenses under the current system with their expenses under ColoradoCare. That study projects that Under ColoradoCare, in 2019 Colorado residents and employers would pay $26.7 billion in premiums and out-of-pocket expenses for the services typically covered by comprehensive health and dental insurance — $4.5 billion less than the $31.2 billion cost with the current system.

ColoradoCare would have no deductibles, no copays for most preventive and primary care, and would waive other copayments when they cause financial hardship. All Coloradans would have affordable health care. The current system is projected to leave more than 23% Coloradans underinsured in 2019. There would no longer be burdensome medical debt or bankruptcy caused by medical bills. Overall, Colorado residents and employers would pay $4.5 billion less for health care. The calendar year 2019 is projected to have a $1.5 billion surplus to offset future health care costs and/or be refunded to Premium Tax payers. Overall, Colorado residents would gain over $1.1 billion from income tax deductions.

We take no position on whether or not the initiative should be approved. It would rely on cost cutting in the healthcare system which could have an adverse impact on providers.

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 November 3, 2016

Joseph Krist

Municipal Credit Consultant









It comes as no surprise that the State of New Jersey, through its Department of Community Affairs, rejected the City of Atlantic City’s plan for fiscal recovery. Dependant on asset sales and bond issues and shifts of costs as much as cuts in costs, the plan faced an uncertain reception at best. The next step is a likely takeover of the City’s fiscal affairs by the State through the DCA.

The DCA found that the City failed to take the steps necessary to implement the signature components of its Plan during the past 150 days. That inaction, combined with the Plan’s disappointing shortcomings, compelled the Department to conclude that the Plan is not likely to achieve financial stability for the City. The DCA finding said it was incumbent upon the City to include those specific actions statutorily mandated to be included in the recovery plan. Here are its summary conclusions.

First, the City’s submission does not meet basic requirements of the Act. It does not include a proposed balanced budget for 2017 that complies with all of the applicable conditions of the Local Budget Law. Nor is it adequately responsive to all of the Act’s eight specific directives insofar as some important details are missing and some are factually wrong.

Second, there is a significant financial gap each year and a cumulative financial shortfall across the recovery period in excess of approximately $106 million. Even more modest estimates of the fiscal gap would yield a structural deficit that could never be closed by the actions outlined in the City’s Plan. Some glaring errors or omissions that contribute to the shortfall include: understating debt service over the next five years by approximately $18 million; failing to accurately estimate the revenues collected from the investment alternative tax by improperly anticipating an excess of IATs of approximately $31 million over the life of the Plan; and overstating property tax revenues by approximately $20.5 million, based on the City’s flawed assumption that the property tax base will remain constant for the Plan period.

Third, the Plan presents a number of other operational and qualitative concerns described within this Decision. Although the Plan outlines an additional headcount reduction of 100 over the life of the Plan, it is not enough to sustainably address one of the biggest cost drivers in the City’s budget. Indeed, more generally, the City neglects to quantify operational savings achieved through full implementation of cost cutting strategies. Independent financial experts advise that in the current financial marketplace, given Atlantic City’s credit rating, the cost would be significantly higher than the City’s projections. The DCA finds that the City’s proposed sale of Bader Field is not likely to aid the City in achieving financial stability and is not prudent fiscal management.

Despite the extraordinary need to raise revenue, the City chose not to increase taxes at any point during the five-year recovery term and provided no analysis to support its decision. Further, the City has not provided evidence of negotiated PILOT agreements with casino properties as required by the PILOT Act, thereby jeopardizing revenue collections during calendar year 2017 and beyond. Nor does the Plan sufficiently account for future payments for off balance sheet liabilities.

So the City is left to rely on political machinations in Trenton. Much will be made about the importance of local control and the override of the elective process. Many will insist that the decision was a fait accompli and that this is the outcome the Governor wanted all along. It is hard to overlook the City’s history of inept and corrupt operations especially in the light of the obvious difficulties the City’s one dimensional economy faces.  The 150 day process since Memorial Day has been characterized by fits and starts, missed deadlines, and declarations of default under a loan agreement with the State. For creditors, the threat of bankruptcy is effectively taken off the table.


The “clawback” provisions that GO creditors have historically counted on to buttress their case for full repayment have never been challenged in or affirmed by a court. That may soon change as senior creditors of the Puerto Rico Sales Tax Financing Corp. (Cofina) have filed a petition to intervene in the action entitled Lex Claims LLC et al. v. García-Padilla pending in the U.S District Court for the District of Puerto Rico to enforce the stay on the litigation established by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

The holders of COFINA debt have intervened with some intensity. “In response to certain General Obligation (“GO”) bondholders’ meritless assertions directed at COFINA in the Action, we have filed a motion to intervene for the limited purpose of enforcing the stay on litigation established under PROMESA. At the appropriate time, our group will comprehensively set forth why challenges to COFINA lack merit,” the senior creditors said in a statement.

The GO bondholders under Lex Claims sued the government in June to stop it from transferring funds to pay for services instead of debt. Earlier this month, they sought to amend their original complaint to force Puerto Rico to use Cofina funds to pay its GO debt. Lex Claims contends the commonwealth continues to favor certain bondholders, namely Cofina bondholders, by siphoning off hundreds of millions of dollars in tax revenues each year to pay them in disregard of the Puerto Rico Constitution and in violation of Promesa. GO bonds are explicitly protected by the Puerto Rico Constitution, and are therefore protected by Promesa, they contend.

The senior Cofina creditors’ position assumes that Congress deemed the temporary stay essential to stabilize Puerto Rico for the purposes of resolving its fiscal crisis. “Unfortunately, the Plaintiffs (Lex Claims) appear committed to evading the restructuring process set out by Congress and doubling down on the obstructionist positions they took in the lead up to Promesa’s passage. We agree with the Financial Oversight & Management Board for Puerto Rico’s recent observation ‘that ongoing litigation is a major distraction that interferes with the Oversight Board’s congressional mandate.’

“As constructive participants engaging in good faith negotiations with the Government of Puerto Rico and other bondholder groups, we believe that the Plaintiffs’ efforts to circumvent congressional intent and disrupt established processes undermine the best interests of the Commonwealth, its citizens and creditors,” the Cofina creditors maintain.

In the recently filed proposed Second Amended Complaint, Lex Claims advance legal theories premised on “fundamental mischaracterizations of Promesa and a complete disregard for the statutory and constitutional framework” under which the Commonwealth established Cofina nearly a decade ago. Cofina already establishes that part of its revenues goes to a trust fund automatically to pay bondholders. “In short, the Plaintiffs’ claims amount to a baseless, untimely request to declare that the Sales & Use Tax [SUT, or IVA by its Spanish acronym] is an ‘available resource’ under the Puerto Rico Constitution and to strip Cofina creditors of their vested property interests. Not only do the Plaintiffs’ claims find no support under Promesa or Commonwealth law, but they ignore the express admonitions in the offering documents for the GO bonds, which specifically provide that COFINA’s portion of the SUT is not an ‘available resource,’ and is not subject to clawback should there be a shortfall in payment of the GO bonds,” the COFINA creditors said.

In the nearly 10-year period since the Puerto Rico Legislative Assembly first transferred a portion of the then newly created IVA to Cofina, no challenges to the agency have been made. Given Cofina’s bi-partisan support since its creation, a COFINA creditors’ release said this is not surprising. “Indeed, the Commonwealth and investors alike, including the Plaintiffs, all benefited from the low-cost financing that COFINA offered. The lack of any challenge to COFINA underscores the manifest deficiencies in the Plaintiffs’ claims and is also fatal to their attempts to now evade PROMESA’s mandatory stay,” the group added.

The Promesa Board filed a request to intervene in three other bondholder lawsuits, two against the Puerto Rico Highway and Transportation Authority (HTA) and one against the Employees Retirement System (ERS). In its filing it said “the Oversight Board is also entitled to intervene because it has an interest relating to the transaction (lifting PROMESA’s automatic stay) that is the subject matter of these actions; lifting the stay could impair the Oversight Board’s ability to perform its statutory functions; and the other parties to this litigation are not likely to represent the Oversight Board’s interest adequately.” The board, created by the Puerto Rico Oversight, Management and Economic Stability Act, intervened in the three consolidated cases as it did on Oct. 21 in four other lawsuits from litigants who challenged the constitutionality of the Emergency Moratorium and Financial Rehabilitation Act.

The hearing on the three consolidated cases was slated to begin Nov. 3. One lawsuit was filed by Altair Global Credit Opportunities Fund and some 30 hedge funds against the Employees Retirement System. Peaje Investments and Assured Guaranty Corp. have both sued the government for diverting funds from the HTA. The Altair case wants employees’ contributions to retirement to be put in a separate account for their benefit even though in the lawsuit filed Sept. 21, the plaintiffs said they intend to work with the board to manage Puerto Rico’s finances and renegotiate its public debt.

Before the board’s intervention, federal Judge Francisco Besosa had denied a government request for a continuance of the Nov. 3 hearing to allow the parties more time for discovery. The government argued that after the court agreed to consolidate on Oct. 14, the lawsuit of Altair with the cases of Peaje and Assured, the movants in the Altair case haven’t started the process of meeting-and-conferring about witnesses, exhibits or stipulations—neither with the commonwealth nor with the plaintiffs in Peaje or Assured. The government also argued that the continuance was going to give the board time to decide whether to intervene in the three consolidated cases.

here will be no quick and easy resolution or restructuring of Puerto Rico’s debt. The decision will have to made as to whether a stautory action can override constitutional provisions. If the litigation to enforce the “clawback” succeeds it will have hugely positive ramifications for the GO debt and very negative consequences for the COFINA debt. This is a battle that it was in the interest of many to avoid. The action’s of the current administration have in large part forced the issue and that choice of path has been hard to understand outside of the political context. Those politics seem to be leading to an undesirable political conclusion for their perpetrators so the choice makes even less in that light.


It has been four years since the City of San Jose attempted to reform its pension plans covering police and firemen. At the June 2012 election, San Jose voters adopted Measure B. Among other things, Measure B required employees to make additional retirement contributions. Measure B also required the City Council to adopt a retirement program under which employees who “opted in” to a lower retirement formula would not be required to make the additional retirement contributions, and would retain some existing benefits and have others reduced. It required the City to adopt a retirement plan for new employees that could include social security, a defined benefit plan and/or a defined contribution plan, and included caps on the retirement benefits of new employees. It also limited disability retirements.

In April of this year, a judge upheld an order from last month to accept a request from the San Jose Police Officers’ Association and the city to overturn the measure on a “procedural defect” — that the city didn’t fully bargain with labor unions before placing the initiative on the ballot. That was the city’s strategy to overturn Measure B and replace it with a negotiated settlement with its unions.

Instead on November 8, voters will be asked to approve Measure F to amend the San Jose City Charter to change employee retirement contributions and benefits, and retiree healthcare benefits. According to the City, retirement benefits for Tier 2 members would be improved to levels similar to other Bay Area agencies as well as providing that the costs of the benefit are shared 50/50 between the City and employees in specified increments. The defined benefit retiree healthcare plan that established levels of healthcare benefits would be closed to new members. Tier 1 Employees who return after leaving the City would be Tier 1 Employees.

The pre-Measure B definition of disability would be reinstated. An independent medical panel would be created to determine eligibility for disability retirements. The elimination of the SRBR would continue and be replaced with a Guaranteed Purchasing Power benefit to protect retirees against inflation. Both City and employees would be required to make the full annual required plan contributions calculated by the Retirement Board. Voter approval would be required for any future enhancements to defined retirement benefits. Retroactive benefit enhancements would be prohibited.

The City’s Budget Director and an outside actuary have concluded that Measure F and the related agreement will secure $40 million in taxpayer savings in its first year, with savings projected to grow each following year. The mayor and 10 of 11 members of the City Council are on record as being in support of the measure. Opposition is centered in local anti-tax groups.


Indian River and Martin counties filed separate motions for summary judgment Oct. 20, setting their 2015 suits involving All Aboard Florida’s planned Brightline service on course for a final decision. The two Florida counties say they have proven in federal lawsuits that the $1.75 billion private activity bond allocation for an in-state passenger train project should be vacated. “We’re hoping the case will be submitted to the judge in early December, and then the judge will dispose of the case as he sees fit,” said an attorney representing Martin County.

Both counties filings asked that the judge should rule in favor of their claim that the U.S. Department of Transportation violated the National Environmental Policy Act at the time it approved All Aboard Florida’s request for tax-exempt bond financing. In its response to the suit, the USDOT said it didn’t violate the law, and the counties are not entitled to relief, which would be a reversal of the agency’s approval of the bonds. USDOT also claims it is not required to conduct a review under NEPA, the National Historic Preservation Act, or the Department of Transportation Act.

Although the company said that when the suits were filed no Final Environmental Impact Statement or Record of Decision – documents associated with the NEPA process – had been issued for the project. The final Environmental Impact Statement has since been released, but the Record of Decision – a document that concludes the NEPA review process – has never been issued.

All Aboard Florida has until Jan. 1 to issue the bonds. With other financing, construction is well under way on stations in Miami, Fort Lauderdale and West Palm Beach where service is expected to start next year. U.S. District Judge Christopher R. Cooper, in an August ruled that the counties proved that the USDOT bond allocation should have been considered in a federal environmental review process. The judge said that the counties had legal standing to proceed with their challenges because they demonstrated that the project likely would not be built without tax-exempt financing – a reversal from a decision in June 2015.

Information produced during discovery, the judge said, raised “legitimate questions” about All Aboard Florida’s commitment to completing the second phase of its project, from West Palm Beach to Orlando, without the use of private activity bonds. He said the issue “casts some doubt as to whether AAF is truly serious about moving forward with phase 2 of the project regardless of the outcome of this lawsuit.” USDOT and All Aboard Florida must file responses to the motions by Nov. 4. Reply briefs from the counties are due Nov. 14.


Dignity Health (A3) and CHI (A3/BBB+) have signed a nonbinding agreement to evaluate “an alignment” between the systems, according to a release. A full merger would create the nation’s largest not-for-profit hospital company with combined revenue of $27.6 billion ahead of the $20.5 billion posted by Catholic-sponsored Ascension. A CHI-Dignity merger would leave it trailing only Kaiser Permanente as the largest not-for-profit health system. The companies did not disclose terms of the agreement, only alluding to last month’s news that they had formed a partnership called the Precision Medicine Alliance, which the two systems called the nation’s largest community-based precision medicine program.

“The potential to align the strengths of these two organizations will allow us to play a far more significant role in transforming health care in this country,” CHI CEO Kevin E. Lofton said in a news release. “Together, we could enhance our shared ministry as the health industry transitions to a system that rewards the quality and cost-effectiveness of care.”

Englewood, Col.-based CHI has 103 hospitals in 18 states and focuses on clinical and home-health services in addition to research. CHI, however, is facing some financial struggles having incurred a net loss of $568.1 million in the first nine months of fiscal 2016, which began July 1, 2015. Health IT costs, investment losses and troubles with its health insurance company were cited. CHI’s credit rating from Fitch, which covers $6 billion of outstanding debt, now sits at BBB+ from A+. It was lowered in July. That loss was a substantial deterioration from its fiscal 2015. For all of 2015, CHI managed a meager $3.1 million gain on operations on revenue of $15.2 billion. CHI’s debt-to-equity ratio has been a huge negative metric  in recent years. At about 50% in 2011, it rose to nearly 100% in 2013 and on to 110% in 2015.

San Francisco-based Dignity Health operates in 22 states with 9,000 physicians, 62,000 employees and 400 care centers. Dignity has 39 hospitals. It is the nation’s sixth-largest not-for-profit health system. It posted an operating loss of $63.4 million on revenue of $12.4 billion in its 2016 fiscal year ended June 30.

The Precision Medicine Alliance will initially focus on advanced diagnostic tumor profiling in cancer patients, but will eventually expand to treating other areas of cancer and cardiac illnesses, according to a news release. The program will also build a collection of clinical cancer data that can be used to better diagnosis and treat patients. The systems will integrate patient electronic health records in order to build the database. Both systems operate Catholic and non-Catholic hospitals and delivery hubs.

Given the similarities in ratings, from that standpoint the initial impact on the credit should  not be great. Integration risk is the most likely source of uncertainty in the short run. Longer term the proposed merger has the potential to stabilize and strengthen the overall credit of the resulting entity.

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