Monthly Archives: January 2017

Muni Credit News January 31, 2017

Joseph Krist



Last month, the Trump transition team asked the governors association to collect infrastructure wish lists from the states, with an emphasis on “shovel ready” projects that are far enough along in engineering, approval and even construction to begin using the money quickly, and those that enhance national security and economic competitiveness, especially in manufacturing. The president has expressed a preference for private partnerships. Well a list has emerged and we noticed a few trends.

The National Governors Association has released its Priority List – Emergency and National Security Projects. It includes roads, port facilities, dams, river locks, mass transit, bridges, tunnels, and power facilities among others. Some are traditional publicly financed projects seeking federal assistance under traditional programs. Others are wholly privately funded while others are some form of public private partnership. Of the 50 projects on the list, 11 are federal Army Corps of engineers river lock projects. Two others involve all federal projects.

We note some old favorites on the list. These include New York’s Second Avenue Subway, the Maryland Purple Line P3 (MCN 8/4/16), and the Texas Central Railway (7/21/16). The latter two have had their share of controversy over a variety of issues which have held up progress. Those issues will not easily disappear through inclusion on this list.

Of note are the proposed energy projects whether for generation or transmission. These are generally private projects which would now benefit from any infrastructure tax credits which might be adopted through either tax reform or infrastructure legislation. It does not appear that they were ever anything but private projects. They include wind power in Wyoming, transmission in the Southwest, the Northwest, and in New York State. Water supply and storage projects on the list are all private developments as well although end users can be municipal systems and/or customers.

The projects represent various degrees of technological risk if for no other reason than their scale. Of great interest is a privately developed electricity storage system being undertaken in Southern California. Simply put, the project would be a set of giant batteries which could be used to store power generated by renewable energy generation sources and then used to in place of peaking generating units. These have tended to be older less efficient (and dirtier) generating units which are more readily turned on and off. Advances in this technology would have real implications for the use of renewable generation nationwide.

It would seem on its face natural to assume that there would be a place for the low-cost benefits of municipal bond financing in the overall infrastructure scheme. A number of established municipal bond issuers are participants in these projects. They include the Port Authority of New York and New Jersey, Chicago Transit Authority, the Miami-Dade Expressway Authority, the Port of Seattle, the Saint Louis Airport Commission, the Greater New Orleans Expressway Commission, the MTA, the MBTA, Dallas Area Rapid Transit (DART), Northeast Ohio Regional Sewer District, and Departments of Transportation in Colorado, New Hampshire, Ohio, Kentucky, and Pennsylvania. The diversity of issuers by purpose as well as by location would seem to create a foundation of support for the use of tax exempt bonds going forward.


The Puerto Rico Energy Commission (PREC) ordered the Puerto Rico Electric Power Authority (PREPA) “to use all reasonable efforts to persuade the Promesa Oversight Board to provide the maximum debt-service relief available, demonstrating to that board how the savings will benefit the commonwealth’s economy and consumers.”PREPA has said it will defend the current restructuring agreement negotiated with 70% of the bondholders and which cut the debt by 15% before the board, established by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), was set up.


“PREPA wants to use Promesa to force all the creditors to accept the 15% cut, but that is not the best alternative. PREC is telling PREPA to use all of its powers under Promesa to get the best deal possible,” he said. The PREC order gave PREPA 120 directives on its operations, which business and renewable energy officials said virtually put the utility “under a trust” and under the complete control of the commission. While the order establishes new rates, they will not be permanent. The first rate-revision case will be in October 2017 to determine revenue requirements as well as start evaluating PREPA’s future budgets.

The order raised the basic electricity rate but resulted in a cut in the provisional rate imposed by PREPA last year. The average basic rate was set permanently at 1.025¢ per kilowatt-hour (kWh) compared with 1.299¢ per kWh for the provisional rate. The reduction of 27.4¢ per kWh is the equivalent of $45 million in savings yearly for consumers and businesses. The basic residential rate is 4.34¢ per kWh while the commercial and industrial rates are between 7.67¢ per kWh and 7.80¢ per kWh but those rates do not include other costs and fuel adjustments.

The commission did not raise the “demand charges” for the industrial sector. PREC also established controls over the utility’s debt, set guidelines for PREPA to be transparent and have clear, well-understood accounting records; ordered a performance probe into the utility; and established a process to periodically revise tariffs, which means the rate the commission set is not going to be permanent.

The order hinders the integration of renewables into the system; does not discuss the issue of private investment to help deal with PREPA’s inability to access markets; and does not give adequate weight to the impact of the tariffs on economic development, promote manufacturing through competitive costs or promote wheeling to force PREPA into providing more competitive costs.

One estimate is that PREPA’s level of debt is the equivalent of 5.6¢ per kWh, or 24.5% of the utility’s total costs after restructuring. For these reasons, the commission ordered PREPA to take “all actions possible” to use the Promesa process for the advantage of PREPA’s customers. “If and when these changes occur, PREPA shall inform the commission of the necessary changes to the revenue requirement. On receiving that information, the commission will determine how and when to adjust the revenue requirement,” PREC said.

According to PREC, the final debt costs to PREPA’s ratepayers will depend on the application of Promesa’s provisions. Under Section 601 of Promesa, if a certain percentage of bondholders choose to participate in a debt-restructuring process, the oversight board can require the remaining bondholders to participate as well. PREPA’s RSA is only with 70% of its creditors and the utility wants to include them all. PREC said that if all creditors participate in the restructuring agreement, some $314 million in debt would move out of PREPA’s fiscal year 2017 revenue requirement and into PREPA’s revitalization corporation revenue requirement, to be recovered through the new transition charge. “Ratepayers would save money because all the debt, rather than only the participating debt, would be subject to the 85% recovery cap, the lower interest rate and the five-year principal holiday called for by the restructuring support agreement.

In its order, PREC did not pass judgment on the performance of PREPA’s Chief Restructuring Officer in the debt-restructuring negotiations because the intervenors in the technical hearings did not present evidence to show she could have obtained a better deal. PREPA has already obtained from most bondholders a 15% reduction in principal, lower interest rates and a five-year deferral of principal. “No intervenor presented evidence that PREPA could have obtained more concessions had it bargained more effectively,” the commission said. “In a political setting, it may be acceptable to complain about costs. In an administrative adjudication, arguments require evidence.”

PREC noted that there has been a reduction in technical staff and the system was very poorly maintained in 2014 and 2015, adding that PREPA’s situation was far more serious than expected. Puerto Rico’s government-run electricity utility and its creditors agreed to extend a restructuring agreement, giving the authority more time to comply with the only deal the island has reached to cut some of its $70 billion debt. PREPA extended a deadline contained in the deal until Feb. 28, creditors said


New York; Oakland, Los Angeles; Minneapolis; San Francisco; and Seattle are all so called sanctuary cities. Other cities like Philadelphia have declared themselves “Fourth Amendment” cities and refuse to support unreasonable searches and seizures and no longer commit their police to federal immigration work. With his executive order on immigration, President Trump has threatened to withhold federal funding from cities which refuse to cooperate with federal immigration enforcement efforts. For many cities with this status, a loss of federal funding could cause real fiscal distress. There is however, real uncertainty about how enforceable this threat is.

On November 20, 2014, an executive order directed Immigration and Customs Enforcement (ICE) to discontinue the Secure Communities program, under which noncitizens arrested by local law enforcement could be detained and eventually transferred to federal custody to process their deportations. In 2014 several federal district courts had found that local police would be liable for civil rights violations if they heeded ICE detainer requests by keeping noncitizens in custody when a citizen in the same situation would be released.

The constitutional problem was that ICE does not obtain judicial warrants before it arrests immigrants for deportation. Nor is there any immediate probable cause finding. In immigration enforcement, warrantless arrests are the norm, and there is no automatic, neutral review of probable cause if the arrested person is held in custody as would be required in a criminal case under the Fourth Amendment. As a result, federal district courts found no legal basis for local police to detain people, even when an ICE officer believed them to be in the country unlawfully.

Cities and counties will rely on this trend of court findings to support their refusal to support ICE detainer requests. They will additionally rely on the June 28, 2012, U.S. Supreme Court decision in the case challenging the constitutionality of the Affordable Care Act (ACA), National Federation of Independent Business (NFIB) v. Sebelius. The Constitution grants Congress certain enumerated powers, and when Congress acts within those power, its laws are supreme. All powers that are not specifically enumerated in the Constitution as belonging to the federal government remain with the states pursuant to the Tenth Amendment. If Congress oversteps by enacting a law (or the President issues an executive order) that exceeds its powers, the Supreme Court has authority to declare the law or order invalid.

In NFIB v. Sebelius, the Roberts plurality found that when conditions on the use of federal funds “take the form of threats to terminate other significant independent grants,” as opposed to governing the use of the funds themselves, Congress has impermissibly pressured states to implement policy changes. In their joint dissent, Justices Scalia, Kennedy, Thomas, and Alito stressed that the “legitimacy of attaching conditions to federal grants to the States depends on the voluntariness of the States’ choice to accept or decline the offered package.”

According to this group, while Congress may encourage states to regulate in a certain manner, Congress may not compel states to do so because political accountability would be threatened. Like the Roberts plurality, the joint dissent notes that Congress is prohibited from directly “‘commandeer[ing] the legislative processes of the States by directly compelling them to enact and enforce a federal regulatory program,” and Congress should not be able to effectively accomplish the same goal by coercing states to participate in federal spending programs.

Based on this body of existing legal thinking, we think that the immediate danger to local fiscal positions is not high. We expect that any hold back of funds would be greeted with a strong legal response from entities with both the means and the motivation to pursue all of their legal options. It is important during this tumultuous time in America’s politics to remember that much of what is emanating from the White House in this first week are symbolic actions designed to show the appearance of real sustainable actions. Many of them will require action by Congress for them to be funded and implemented while others, such as this one, will be subject to extensive judicial review. Our view is that none of them at present should be the basis for credit concern.


Illinois state senators have deferred their planned vote on a compromise to end a historic budget deadlock until February. Not a single vote was recorded on what has been called the “grand bargain” to loosen the grip of stalemate between Democrats who control the Legislature and Republican Gov. Bruce Rauner. This is the longest period a state has gone with no spending plan since World War II. It has created a projected deficit of $5.3 billion, $11 billion in overdue bills and a $130 billion gap in what’s needed to cover retirees’ pensions.

Senate President John Cullerton, said “The problems we face are not going to disappear; they’re going to get more difficult every day. When we return Feb. 7, everybody should be ready and prepared to vote.” The plan raises the income tax and creates a service tax to beat down the deficit; includes cost-saving measures to the workers’ compensation program and a property-tax freeze sought by Governor Rauner. Pension- and school-funding overhauls are included as well as expanded casino gambling and more.

In the meantime, Attorney General Lisa Madigan, a Democrat, filed a motion in St. Clair County Circuit Court, requesting a judge to dissolve his July 2015 order that authorized the state comptroller to pay wages of all Illinois employees despite the state not having a budget in place, court documents showed. The order has “removed much of the urgency for the legislature and the governor to act on a budget,” Madigan said in a statement.


Time and time again, local governments get themselves mixed up with private recreational attractions which come back to bite them financially. One more example of this is in Kentucky. Floyd County saw  its rating lowered to Ba1 in 2013. The move reflects the county’s reliance on volatile and declining intergovernmental revenues derived from coal severance taxes to subsidize its increasingly unbalanced operations. The rating also reflects substantial tax base concentration in coal mining and a weak socioeconomic profile, with poverty and unemployment levels much higher than state and national medians. The downgrade also captures significant risk related to county debt issued for the Thunder Ridge Racetrack.

Now the racetrack threatens to severely impact County finances. For several years, Keeneland (the thoroughbred breedstock seller) was in talks with Appalachian Racing Inc., which owns and operates Thunder Ridge, to buy that track’s license. The plan was for Keeneland to move the license to a quarter-horse track that it wants to build in Corbin. Floyd County officials had hoped that deal would include paying off the debt left on a $2.7 million bond that the county issued in 1993 to help the Thunder Ridge project.
But Keeneland has announced it would no longer pursue the Thunder Ridge license and will instead apply for the state’s ninth license, which is not assigned to any track. Keeneland also said its potential deal to buy Thunder Ridge never included debt on the Floyd County bond. The County believes that it had a separate agreement with ARI that if Keeneland bought the Thunder Ridge license, ARI would pay off the bond debt.

Without the sale, local officials are concerned that the company someday either won’t or can’t keep up the payments which are relied upon to pay debt service. The County would then be responsible. Expenses at Thunder Ridge have outstripped revenue for several years. The county has no surplus to pay the $2.1 million. Five years ago, the county’s annual budget neared $20 million, but that has been cut to $11 million in the face of a declining coal industry.

The Thunder Ridge deal was set up with a $2.7 million bond issued by the Floyd County Public Properties Corp. Thunder Ridge declared bankruptcy in 1994 but reorganized and stayed open, sometimes asking for Floyd County’s help with bond payments. Now, a refinancing deal was issued in April 2016 and will be due May 1, 2017. It is not clear what will happen if the County is unable to refinance the bonds.


We had the opportunity to participate in a roundtable involving issuers, investors, and accounting professionals hosted by the Governmental Accounting Standards Board. The subject was what kind of information should be required to be included in the notes to audited financial statements. For the average individual it wasn’t riveting stuff, but for the professionals in the room it provided a window into the various prisms through which providers and users of governmental accounting see the purpose and value of their financial statements.

For large issuers of debt supported by the financial and technical resources, compliance with accounting standards is often simply an issue of will. Their need for regular access to the public financial markets in substantial amounts makes the need for investor friendly disclosure clear if not obvious. In spite of some four decades of effort by the Board and the investor community, smaller irregular issuers still do not necessarily see the need for the level of detail investors desire. In other cases, their overseers (usually boards of directors) are not supportive of efforts to provide information outside of what they see as the scope of their requirements.

My biggest take away from the event is that the effort to obtain fully investor friendly financial accounting from issuers in the tax exempt market will have to continue. Until issuers which do not provide that kind of information lose public market access, they will resist implementation of these “best practices” and investors will continue to be subject to the kind of surprises we discuss in cases like the one just discussed involving Floyd County, KY.

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 January 26, 2017

Joseph Krist










If you wanted a sure fire way to throw a wrench into  the state budget making process, proposing block granting the Federal share of Medicaid is a pretty good place to start. So in spite of the many issues such a change would raise, Kellyanne Conway, who is Mr. Trump’s White House counselor, said that it would ensure that “those who are closest to the people in need will be administering” the program. Since its creation in 1965, Medicaid has been an open-ended entitlement. If more people become eligible because of a recession, or if costs go up because of the use of expensive new medicines, states receive more federal money.

Among the uncertainties which would result from such a change are: How much money will each state receive? How will the initial allotments be adjusted — for population changes, for general inflation, for increases in medical prices, for the discovery of new drugs and treatments? Will the federal government require states to cover certain populations and services? Will states receive extra money if they have not expanded Medicaid eligibility under the Affordable Care Act, but decide to do so in the future?

A bipartisan group of governors raised issues like: “States would most likely make decisions based mainly on fiscal reasons rather than the health care needs of vulnerable populations.” “States should be given the ability to reduce Medicaid benefits or enrollment, to impose premiums” or other cost-sharing requirements on beneficiaries, and to reduce Medicaid spending in other ways. “Flexibility would really mean flexibility to cut critical services for our most vulnerable populations, including poor children, people with disabilities and seniors in need of nursing home and home-based care.”

Speaker Ryan indicated that House committees will mark up a reconciliation package in the next couple of weeks that will both repeal President Obama’s healthcare law and replace portions of it. Yes, portions of it. It will be a repeal with some replacement in it for what is able to be done given the reconciliation process. This does not do a lot to reduce uncertainty for state government. Of course, anything that causes state budget uncertainty leads to uncertainty for providers. There were already enough issues facing hospitals in 2017 that made the sector particularly credit vulnerable. This proposal simply ratchets up that uncertainty for investors and decreases the attractiveness of the sector even more.


With all of the emphasis on the impact of block granting Medicaid on states, it is easy to forget that county governments pick up 25% of the cost of the program. In addition, New York City functions as one county in that regard as it picks up 25% of the Medicaid costs in the City. As the effective front line providers of Medicaid funding, counties had historically come under strain financially. In past decades, county health facilities serving those patient cohorts experienced extraordinary pressures leading to low liquidity, extra borrowing, and the need to sell or close hospital and other health facilities. These included not just smaller rural counties but major metropolitan counties like Erie in NY, Fulton in GA, Dade in FL, Cook in IL, and San Bernardino in CA.

New York City will find itself under pressure as the result of its unique position in the Medicaid funding chain. If block grants reflect reduced revenue, the City will have to find other sources of expense reduction to offset the burden. This will be more difficult than some might expect as the DeBlasio administration’s hiring spree has built in much more employee expense to the budget. We anticipate that the City’s ratings would come under pressure under those circumstances.

Thus, the proposed changes to Medicaid add additional worry to those investors who may have already soured on the GO sector. Added to pension and benefit pressures, Medicaid may become one more brick on a load that threatens to weaken the sector in general and some credits in particular.


The Mayor released his latest Financial Plan Update and his preliminary look at the upcoming FY 2018 budget. This indicated several more potential headwinds for the City. Tax revenue growth is expected to slow to 2.4% in FY 2017 and improve moderately to 3.9% in FY 2018. Non-property taxes were flat in FY 2016 and are expected to grow 0.5% in FY 2017. Taxes from real estate transactions have declined nearly 15% in the first half of FY 2017 relative to the same period in FY 2016. In addition, the Plan makes certain assumptions that face difficulties in Albany. These include approval of the Governor’s college tuition plan and the extension of the highest tax bracket a.k.a. the Millionaire’s Tax.

Since the last Plan Update in November, the City projects reductions in reserves of $1.2 billion and unspecified savings of nearly $600 million in order to cover a projected gap of $2.6 billion in FY 2018. This in spite of projected annual growth in personal service cost expenditures of 5.5% over the next four years. Debt service is projected to increase 8% annually  in support of a robust capital program. Bonded debt issuance is projected at $6.5 billion annually over 10 years. It is hard to see how that level of spending growth can be sustained. Should the Mayor not be reelected this November, his successor will be saddled with significant expense management issues.

These factors, in combination with the Medicaid issues noted in the prior section, make us cautious on the outlook for the City’s credit. Approximately 25% of budgeted revenues come from state and federal sources and both are subject to significant uncertainty. Should all of the headwinds we have mentioned to occur, it will take strong, timely, and decisive management to handle their impact and maintain the City’s fiscal position and ratings. Here, we think that the Mayor’s record to date does not inspire confidence.


The Securities and Exchange Commission announced fraud charges and an emergency asset freeze obtained against a businessman in South Carolina accused of siphoning funds he raised from investors for the purpose of purchasing or renovating senior housing facilities.

The SEC alleges that Dwayne Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings.   The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama.  From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.

“As alleged in our complaint, investors thought they were investing in a single senior housing project while their money was actually being used to fund an ever-expanding web of affiliated facilities and the personal expenses of Edwards and his friends and family,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, filed January 20 in federal district court in Newark, N.J., also charges Edwards’s former business partner Todd Barker, who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.


Senate Democrats were to present their plan for a $1 trillion infrastructure plan. That plan dedicates $180 billion to rail and bus systems, $65 billion to ports, airports and waterways, $110 billion for water and sewer systems, $100 billion for energy infrastructure, and $20 billion for public and tribal lands. At the same time, the Republican leadership gave quite mixed signals regarding the timing of any infrastructure legislation. A major infrastructure package, initially had not been part of Ryan’s 200-day plan. But in recent days, Trump had personally asked Ryan to add it in. That said, healthcare and tax reform are farther along in the process and that could delay infrastructure legislation into the fall. Now some will be satisfied with enactment by year end.

States and localities are not waiting for federal action. There is some $3 billion of airport, highway, and mass transit bonds on the near term calendar. While Washington argues over the method of financing and identifying infrastructure, projects are moving forward reflecting the strong voter support for such spending shown at the polls in November from coast to coast. And they are using tax exempt bond proceeds to fund it which is something for the Congress to think about as they debate taxes and the tax exemption going forward.


The response of the incoming Rosello administration to PROMESA’s ideas about the way forward for Puerto Rico was quick to be received. It exposed the great divide between the various interested parties in the financial crisis. The Governor’s response was direct. ” It is my view, that any fiscal plan premised exclusively on a reduction in the health, well-being, and living standards of the People of Puerto Rico through healthcare delivery cutbacks, current retiree  pension reductions of our most vulnerable segments of the population, and layoffs is by its nature unacceptable.” The Governor cited Executive Order  No.  2017-001,  which,  among other  cost reduction  initiatives, (1) imposed a reduction of ten percent in government spending for the current fiscal year; (2) ordered a reduction of ten percent (10%) in professional service contracts, and a five percent (5%) decrease in utility spending  for  all  government agencies and public corporations; and (3) mandates  a  twenty percent (20%) reduction in positions of trust in each agency and/or public corporation.

Two other orders require all agencies and public corporations to establish a Zero-Base Budgeting methodology as a way to reduce government spending and imposes a five percent (5%) reduction in purchases of goods in all government agencies. At the same time, the response set out clear areas of contention between the board and the government. Rosello was clear when he said ” we will not increase taxes on the poor and middle class. Instead, where opportune to spark economic growth we intend to reduce such personal income taxes. We seek to establish a comprehensive tax reform. We have already achieved a 10-year extension to the 4% excise tax of Act 154-2010. We will focus on increased collection rates of existing taxes through increased resources and improved processes and technology. We will achieve approximately $600 million in potential incremental revenues from effective collections of the SUT.”

“Currently, only 89,000 individuals file tax returns reflecting earnings in excess of $60,000. This represents only 2.5% of the population. A collaboration strategy with the IRS or global experts could help the Government assess the degree of tax evasion faced by the Commonwealth and will form the basis for new  compliance strategies. As was our commitment, a permits reform will be proposed in the next two weeks. We will seek to increase SUT collections and level the playing field with local businesses by collecting taxes on internet retail sales. We will approve a new Incentives Code to rationalize tax incentives and only maintain the ones that produce a quantifiable return on investment. And we intend to overhaul and modernize municipal property tax and other taxes system to implement projected municipal subsidy reduction. We do not agree with a payroll-focused approach to right-sizing government.”

The position on healthcare and Medicaid may not be realistic. The letter states although additional ACA funding is not contemplated in your baseline assessment, we feel highly confident that we will convince the  Congress of the grave challenges that our people will face if not granted parity in Medicaid and Medicare funding. There is no single political leader in the world that would want to be responsible for bearing the weight of endangering the health and wellbeing of 3.5 million of its citizens. Actually, there is. His name is Trump and he is willing to “endanger” the health and well being of some 20 – 30 million mainland Americans.

Other items include ” We will not limit access to higher education as a key enabler of social mobility and economic development. Plans for pensions would include reform of the various retirement systems, privatizing the defined contribution plans by liquidating the trust fund and transferring  the assets to a 401 (k) program and honor the defined benefits plans with a PAYGo system.

As for the question of debt service, “we will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by PROMESA. We will continue to negotiate with the various creditor groups in good faith, respecting the rule of law, and based on a transparent and audited baseline. As we have agreed, the Government will lead the good faith negotiations with creditor groups with the Board’s collaboration. We will respect the priority of payments established in the various credits and we will establish alternative paths for various creditors, including the possible implementation of a mechanism to mitigate losses incurred by local resident investors.

Clearly the letter is not a blueprint for a swift resolution of this ongoing disaster. It clearly excludes a number of plausible and likely needed actions while further cementing the concept of debt reduction through less than full payment. We are troubled by the articulation of different standards for Puerto Rican versus non Puerto Rican debt holders. All in all the situation continues down its messy path.

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 January 24, 2017

Joseph Krist

Municipal Credit Consultant









A new Washington Post-ABC News poll of 1,005 respondents carried out from Jan. 12 to Jan. 15 showed that President Trump’s proposed reliance on tolls from revenue-producing infrastructure projects was not strongly supported. The tolling plan was strongly opposed by 44% of those polled and somewhat opposed by 22%. Only 11% said they strongly supported the Trump proposal and 18% were somewhat supportive. In a presentation to The United States Conference of Mayors VP-elect Pence said the new administration will work with city and state officials to fund infrastructure projects that deliver results. Trump’s experiences as a developer showed him the significant economic benefits that can result from large infrastructure projects, Pence said.

“Our president-elect believes, as I do, that the federal government can play a critical role in helping our cities thrive,” he said but, Trump last week appointed two well-known New York City developers to leadership of a panel that would oversee the nationwide infrastructure plan. Steven Roth of Vornado Realty and Richard LeFrak of LeFrak Organization have agreed to head up the infrastructure council, according to the Wall Street Journal. We note that Messers. Roth and LeFrak are well known builders of commercial and residential buildings but have no particular history with public infrastructure.

At the same time, Transportation Secretary-designate Elaine Chao tried to send more of a public funding oriented message when she said at her Senate confirmation hearing last week that Trump would be agreeable to more direct federal funding of state and local projects than is contained in the five-year Fixing America’s Surface Transportation Act adopted in 2015. according to House Speaker Paul Ryan, President-elect Donald Trump’s massive infrastructure package should have $40 of private-sector spending for every $1 of public spending by Ryan’s calculation.

Trump claims his plan would be revenue neutral thanks to taxes from new jobs and contractor profits. Ryan also confirms our concerns about what constitutes infrastructure.  “That’s airports, that’s pipelines, that’s roads, that’s bridges, that’s harbors, that’s canals,” said Ryan when giving examples of proposed infrastructure. The President-elect ’s nominee to lead the Commerce Department, Wilbur Ross, told the Senate “The infrastructure paper I put out was meant to provide another tool, not to be the be all and end all.” “There will be some necessity for [direct federal spending on transportation], whether it’s in the form of guarantees or direct investment or whatever.”

We look at the whole scheme with great skepticism. The last two eras of huge infrastructure spending were federally funded  to stimulate the economy (depression era spending programs) or as military programs (the start of the interstate highway system). Neither round was designed to be funded out of contractor profits. We remember more recently the experience when efforts were made to toll sections of Interstate 80 in Pennsylvania which were met with massive opposition from both long distance users but especially those residents for whom interstates effectively serve as local connectors between towns. “Tolling the interstates is a total non-starter,” said Chris Spear, president of American Trucking Associations. “It is toxic and we will fight it, tooth and nail. We need national connectivity and tolling is the worst type of approach.”

Virginia appears to be in the crosshairs of any initial effort to establish private infrastructure finance. The Trump transition team has asked Virginia for a list of potential transportation projects, including specific questions about projects that could include tolls, the state’s transportation secretary says. Virginia responded with a list of projects based on statewide priorities, ranging from the Port of Virginia to Interstate 81. Tellingly, the VDOT Secretary Layne’s response was qualified. “We’d be very happy to have more (projects). But quite frankly, it’s only a very small part of our projects because it’s going to require tolling,” Layne said.

Secretary Layne reinforced the notion that the incoming administration’s infrastructure proposal appears to be focused on $137 billion in tax credits for private companies who invest in return for revenue streams from the projects like tolling. As for the reliance on tax credits – “I think that’s actually a red herring, because most of these guys don’t need tax credits, because for the beginning years there is no taxable income,” Layne said.

“Most of the infrastructure needs in this country are rebuilding assets that aren’t putting in capacity.  … You need a sustainable, multimodal, growing revenue source,” he said. “And so far, that hasn’t come out of the Congress and the Trump administration. Now, maybe repatriation of taxes will be that source; I don’t know.” Virginia has a backlog of projects including  for additional VRE capacity on the Fredericksburg Line; fixes for Interstate 95 southbound at exit 126 onto Southpoint Parkway in Spotsylvania County; $1 million to help convert Columbia Pike in Arlington into a “smart corridor” that could increase transit convenience and use; changes for the intersection of Waxpool Road and Loudoun County Parkway; upgrades for Arcola Boulevard in Loudoun County; and a series of northern Virginia bike, bus and pedestrian projects.


The Oakland Raiders have made it official and applied to relocate to Las Vegas. The league, which has stridently avoided Las Vegas due to concerns about gambling-related issues, would require approval from at least 24 of the 32 teams, and the earliest the owners are expected to vote is late March. The request has come in the face of the explosive growth in daily fantasy sports and other forms of wagering. The N.F.L. is still wary of gambling and its potential influence on games, but players, coaches and some owners, unsurprisingly most notably Jerry Jones of the Dallas Cowboys are not.

The Raiders have said they want to move to Nevada because they have failed for years to find a replacement for their home, the Oakland-Alameda County Coliseum, one of the oldest and most decrepit stadiums in the league. Local government officials have said they cannot pay a large share of the bill for a new sports facility, something the Raiders have demanded. The Raiders would leave a city that already lost the team once, when it moved to Los Angeles in 1982 before returning in 1995. They have significant fan bases in both Northern and Southern California.

This would be the Raiders second recent attempt as they  tried to leave Oakland last year but failed to persuade the owners of other teams to let them build a new stadium in Southern California with the Chargers, who last week announced their move from San Diego to Los Angeles. So the Raiders owner Mark Davis, who also had held meetings with officials in San Antonio, began meeting with lawmakers in Nevada, who ultimately agreed to contribute $750 million in hotel taxes to help pay for a domed stadium that Davis wants to build in Las Vegas.

Lawmakers and business leaders in Oakland can still come up with an alternative plan to keep the Raiders, but time is of the essence. The City Council voted last month to give Fortress, an investment group, 60 days to persuade the Raiders to consider a plan to build a new stadium in Oakland. There are significant questions as to whether Las Vegas can sustain an N.F.L. team, although with about 2.5 million residents, the metropolitan area is bigger than several others with N.F.L. teams, including Buffalo, Green Bay and New Orleans.

How Davis intends to pay for a stadium, could be problematic because the league prohibits owners from having direct interest in gambling establishments. Sheldon Adelson, a casino magnate and the chairman of the Las Vegas Sands Corporation, will reportedly pay $650 million for a share of the new stadium, which is projected to cost $1.9 billion. It is unclear, though, whether he also wants a share of the Raiders.

The N.F.L. owners’ stadium and finance committee was shown plans last week by the Raiders that included building a stadium without financial support from Adelson. Davis will be eligible to receive $200 million in financial aid from the league for stadium construction, and presumably can raise money through the sale of stadium naming rights and licenses to purchase season tickets. But he would also have to pay a relocation fee, which will run into the hundreds of millions of dollars.

Oddly enough, the team will play in Oakland for at least two more seasons while a stadium in Las Vegas is being built. At least that  is built for pro football whereas the L.A. Chargers temporary home will be a 27,000 seat soccer stadium.


The Financial Oversight and Management Board for Puerto Rico, in a letter to the governor, outlines five areas that the Rosselló administration must include in its fiscal plan for the government to generate, between now and fiscal year 2019, additional revenue and/or savings totaling $4.5 billion a year – The five areas include “revenue enhancements” through adjustments to the island’s tax system and improvements in tax administration; “government right-sizing, efficiency and reduction”; reducing health care spending; reducing higher education spending; and “pension reform.”

According to the Board, the revised fiscal plan baseline released by the prior administration estimated that, unless significant fiscal and structural measures are implemented, the Government will have an annual average fiscal gap of $7.0 billion from fiscal year 2019 to fiscal year 2026. In the coming days, it expects to complete the engagement of a forensic accounting firm to: (1) validate the bridge between the Commonwealth’s last audited financial statements as of June 30, 2014 and the fiscal plan, and (2) provide an independent report on the total outstanding indebtedness for the Commonwealth by issuer, list of all debt issues by issuer, use of proceeds of each debt issuance, contractual debt service schedule and debt service currently in default.

Ominously for bondholders, the letter states that even with the immediate successful implementation of these measures the Implied Primary Surplus Available for Debt Service on fiscal year 2019—before taking into account any legacy deficits—is $0.8 billion, which represents only 21% of the contractual debt service of $3.9 billion for fiscal year 2019.

It acknowledges that “from your executive orders declaring a fiscal emergency, imposing salary freezes, limiting the number of non-career personnel and other labor cost reductions and requiring agencies to build zero-based budgets, it appears that your administration shares this priority [of achieving savings through government right-sizing and efficiency improvements.] . The Board recommends that the Government should consider taking the following actions: reducing non-personnel expenditure by at least 10% by re-negotiating large contracts, centralizing purchasing, and implementing other procurement best practices, such as clean sheeting and demand management, among others; reducing payroll costs by approximately 30% by substantially eliminating positions and making other reductions to total public labor compensation, including consolidating and significantly reducing non-essential Government services; eliminating municipal and private sector subsidies and ; right-sizing K-12 education expenditures to the current student population.

The fiscal board also tells the governor that it is “favorably inclined” to extend the deadline for submitting its fiscal plan to the board until Feb. 28, “such that the Board may certify the fiscal plan by no later than March 15, 2017.” The Oversight Board also tells Rosselló it is “favorably inclined” to extend Promesa’s automatic stay on litigation until May 1, “subject to the same conditions.”

So it is fairly clear what must be done. Now we will have a chance to see if the new administration is as serious as it said it was about realistically solving the island’s fiscal situation. The litigation stay is a two sided coin giving the new group some arguably necessary breathing room but nonetheless extending the level of patience required from bondholders from whom so much has been asked already.


Rhode Island Governor Raimondo has become the second Democratic governor this month to announce a plan to guarantee a college education. New York Gov. Andrew Cuomo was the first, with a $163 million proposal to cover tuition at New York’s public colleges and universities for in-state residents whose families earn no more than $125,000 a year.

Raimondo said her plan will cost $30 million a year and cover two years of free tuition at the Community College of Rhode Island (CCR), Rhode Island College(RIC) and the University of Rhode Island (URI). The idea, called the Rhode Island Promise Scholarship, doesn’t propose an income cap as New York’s does. Neither plan would cover room and board.

Students entering CCRI after graduating from high school would be eligible for two years of free tuition and waived mandatory fees, meaning they could earn an associate’s degree essentially without cost. Students at RIC and URI, four-year institutions, would be eligible for similar assistance during their junior and senior years, making their last two years essentially free. According to a study last year by LendEDU, a private group, recent RIC graduates left school with an average of $26,624 in loan debt, with URI graduates burdened by an average of $32,587. When all of the state’s public and private colleges were included, Rhode Island had the second-highest loan debt of any state. Only Connecticut was higher.

The Promise Scholarship program would be open to all resident students who enroll at a state college within six months of graduating high school or earning a GED prior to reaching the age of 19. Public, private and home-schooled graduates would all be eligible. There would be one scholarship per person. A student receiving assistance while at CCRI would not be eligible again after transferring to URI or RIC. Students would have to complete the Free Application for Federal Student Aid, or FAFSA. Federal Pell Grants and other such financial aid would be factored into the free-tuition calculation, lowering the state’s contribution. Students would be required to remain in good academic standing, with at least a 2.0 GPA. RIC and URI juniors and seniors would be required to have completed their sophomore year, having earned 60 credits and declared a major.

The program would cost $10 million in fiscal year 2018, $13 million in 2019, $18 million in 2020, with a projected annual cost of $30 million in 2021, when members of high school classes of 2017 will be seniors in college. Beginning this fall, tuition and mandatory fees are $4,564 at CCRI, $8,776 at RIC and $13,792 at URI. According to data cited by Raimondo’s deputy chief of staff, all Rhode Island high schools graduate a total of roughly 12,000 students every year.


And in New York, after years of stymied progress, the Long Island Power Authority has reached an agreement with Deepwater Wind, which built five turbines in the waters of Rhode Island , to drop a much larger farm — 15 turbines capable of running 50,000 average homes — into the ocean about 35 miles from Montauk. If approved by the utility board this week, the $1 billion installation could become the first of several in a 256-square-mile parcel, with room for as many as 200 turbines, that Deepwater is leasing from the federal government.

The Long Island site is part of a plan to meet Gov. Andrew M. Cuomo’s goal of drawing 50 percent of the state’s power from renewable sources by 2030. That includes developing 2.4 gigawatts of offshore wind, he said in his State of the State address this month, by far the nation’s highest target, equaling the capacity of the Niagara Falls hydroelectric generating station.

Executives have negotiated a contract that they expect the board to approve. Under it, LIPA will purchase all of the electricity delivered from the turbines by an underwater transmission line to a substation in East Hampton, paying a price comparable to what it would pay for other utility-scaled renewables like onshore wind and solar, according to the utility. Those prices have run around 16 cents a kilowatt-hour, higher than its average wholesale price of 7.5 cents.

Deepwater plans to finance the project with a mix of loans and equity investments, though it is unclear if it will be able to benefit from federal tax credits that have spurred investment in wind farms and helped reduce the price of the power they produce. Until this year, a federal investment tax credit worth 30 percent of the development cost could be claimed. That has dropped to 24 percent for projects that begin this year and is set to be phased out by the end of 2019. To qualify, the project would need to demonstrate construction activity by then, which could be open to interpretation by the Treasury Department. This seems like a better example of infrastructure under the Trumpian vision of tax credit based financing. It would also fit the Trump criteria of “big and shiny”.

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 January 19, 2017

Joseph Krist

Municipal Credit Consultant








With high yield money being drawn back to below investment grade tax-exempts, one can hope that a recent trend in the high grade corporate market translates to the municipal market. Investors recently stood fast on three investment-grade bond deals that tried to include more issuer-friendly terms. Most prominently, borrowers were forced language in new bond offerings that would have spared them from paying a make-whole premium in the event of a default (from a simple covenant breach to actual bankruptcy). The three borrowers were chipmaker Broadcom, auto lender General Motors Financial and Brazilian paper company Fibria. In addition, one junk-rated borrower, Novolex,  removed similar language from a bond for its buyout from Carlyle this week.

The action came as Moody’s Investors Service says  the covenant quality of North American high-yield bonds strengthened marginally in the final month of 2016. Moody’s Covenant Quality Index uses a five-point scale, in which 1.0 denotes the strongest covenant protections and 5.0, the weakest. The Covenant Quality Index (CQI), a three-month rolling average, strengthened to 4.19 in December from 4.20 in November, and in so doing moved out of weakest-level territory for the first time since April.  Moody’s said “High-yield bond covenant protections are just above weakest level as we enter 2017.”

Make-whole premiums have long been a sought after term for corporate and corporate backed municipal investors. It allows them to recoup all the payments they expected when first buying the securities if those securities are redeemed early.  They have appeared in natural gas prepurchase and military housing transactions. Last year some borrowers inserted language to prevent investors from demanding these payments if a company defaults. In times of low rates leading some to “chase yield”, borrowers push the envelope to see how much they can get away with. Two US court rulings last year appear to have changed market perception of what those limits may be when it comes to the premiums in question.

In a ruling against pawn shop operator Cash America, the court ordered the company to pay a make-whole premium to bondholders because the sale of the majority of a wholly owned subsidiary violated covenants in its bond indenture. Another court ruled in a case involving Energy Future Holdings ( a well-known name in the muni high yield market) that a company must pay a make-whole if notes are repaid in a bankruptcy.

Davis Polk has taken a position that investors have “traditionally understood” they are not due a make-whole premium when faced with a company’s default or bankruptcy. But, there is a distinction between events of defaults such as covenant breaches (in which case investors clearly do expect to be made whole) and actual bankruptcies (in which investors may have little choice but to accept losing money).

For the high yield muni market, an ability to fight for strong covenants is always in its interest. The average Moody’s scores for bonds rated Ba, single B and Caa/Ca were all weaker than 4.0. Now that rates have been trending upward, it is important that investors take advantage of whatever leverage they have.


Hospital executives in Illinois recently argued before the state Supreme Court to maintain not-for-profits’ property tax exemption. The arguments were in a case brought by the city of Urbana and other taxing bodies who believe that a local hospital, Carle Foundation Hospital, should pay property taxes.

Illinois passed a law in 2012 exempting not-for-profit hospitals in the state from paying property taxes so long as the value of their charitable services was equal to or greater than their tax liabilities. But local governments say the state’s hospitals are profitable enough to exceed that test and therefore should contribute their share of taxes to help fund municipalities. The state constitution only allows such exemptions if the property in question is used exclusively for charitable purposes, they say. The attorneys for the taxing bodies in Illinois argue that the 2012 law goes beyond the constitutional statute by assigning a value to the exemption, which is that hospitals can be exempt if their charitable services are at, or exceed, the value of what it would pay in property taxes.

The challenge to the resulted in the Illinois 4th District Appellate Court last year ruling that the law was unconstitutional. In the state Supreme Court, some of the justices questioned whether the Illinois 4th District Appellate Court had the jurisdiction to consider the case. The justices also questioned whether they should instead on another upcoming case, Oswald v. Hamer, ruled the law exempting hospitals from paying property taxes as constitutional.

Charitable purposes has been interpreted to mean that hospitals provide care to patients regardless of their ability to pay. Carle argued that it’s charitable services far exceed what it would pay in yearly property taxes. Carle estimates that it paid some $20 million in property taxes from 2004 to 2011. Carle contends it provided $30.6 million in charity care in 2015, according to the hospital. The Illinois Health and Hospital Association filed an amicus brief in August 2016 supporting Carle Foundation as did the American Hospital Association on behalf of Carle.

There are approximately  150 not-for-profit hospitals in Illinois. A decision in the case is expected in coming months.


We’re not sure it helps but Gov. Ricardo Rosselló’s representative before the fiscal oversight board stated that the lack of payment between agencies and the “internal liquidity game” to claw back funds from certain government entities to correct general fund deficiencies hinder the process of certifying the government’s real deficit. So said the summary of the final transition report presented to a group of legislators and heads of agency at the Puerto Rico Convention Center. This has caused the deficit to range between $6 billion, as confirmed by the incoming Transition Committee, to more than $7 billion, as the Fiscal Oversight and Management Board established by the Promesa law claims.

If no action is taken to correct this and other governmental deficiencies, there could be a government shutdown and even a “total collapse” of the government, said the representative before the fiscal oversight board. He highlighted the lack of good data. “There is an indisputable reality: The Puerto Rico government’s numbers are still a great mystery…. I predict that if Puerto Rico does not make a dramatic adjustment in the coming months, it could experience a total collapse. If it does not make the corresponding adjustments, there could even be a [government] shutdown,” the incoming Transition Committee president said during a press conference Tuesday.

In addition to this situation, the report details other findings that will be sent to the Governor’s Office, the Office of the Comptroller and the Legislature should an in-depth investigation and corresponding action be decided on, Sánchez said. The official suggested that this final transition report will justify the public policies to be established during the government’s initial months—which include the controversial labor reform being decided on in the Legislature or the fiscal plan that the government must submit shortly.

“Everything that is not essential must be cut because the crisis is real. And what agencies will face is a challenge never seen before and maybe in a few weeks we will find out just how severe things could be here due to the negligent actions of the outgoing administration,” he said. In the absence of a protocol to define what is essential in the government. Sánchez said a group of attorneys was asked to discuss, together with the fiscal board, what will be defined as essential for the Rosselló administration. “The challenge falls on the current leadership to make budget adjustments, make whatever cuts are necessary to guarantee essential services, to guarantee public servants and to protect pensions that are in a very delicate situation today,” he said.

The findings include a deficit of more than $230 million at the Department of Education, primarily for failing to pay rent to the Public Buildings Authority, the more than $500 million owed by the Highway and Transportation Authority (HTA) to its suppliers and the more than $1.4 billion in losses over four years at the Puerto Rico Electric Power Authority (PREPA). In the case of the Government Development Bank (GDB) the situation is critical: “It does not have a treasury [division]. It does not have the capacity to operate as a bank,” Sánchez said. He added that after deposits were frozen through the Moratorium Law, the GDB is exposed to fines for also having frozen federal funds.

The report also questioned $6 million spent on the Energy Commission “without producing any benefits for the population.” There is a $1.9 billion deficit in the Infrastructure Financing Authority  caused by the transfer of HTA debts—which had to be paid off with a multimillion-dollar bond issuance that never took place—and the Metropolitan Bus Authority  has accumulated a deficit of more than $98 million. The Authority, however, acquired 25 new vehicles that do not feature handicap ramps or fare processors, Sánchez said.

Other findings criticized the lack of payment of the University of Puerto Rico’s (UPR) debt despite “having the funds” to do so and the investigations for alleged corruption in the Labor Development Administration and the Puerto Rico Aqueduct and Sewer Authority (PRASA) following the case of former Popular Democratic Party (PDP) fundraiser Anaudi Hernández. As for the Fire Department, 125 positions were appointed without having the $3.25 million needed to pay for them.

These kinds of details give additional credence to the narrative that Puerto Rico’s problems are more intractable than thought. They increase the pressure on creditors to relent and accept more onerous terms of restructuring than is already the case. This while building additional justification for the view that the situation reflects gross mismanagement and political failure for which the creditors could not be responsible.


The Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) prepared at the request of the Senate Minority Leader, the Ranking Member of the Senate Committee on Finance, and the Ranking Member of the Senate Committee on Health, Education, Labor, and Pensions released its estimate of How Repealing Portions of the Affordable Care Act Would Affect Health Insurance Coverage and Premiums.

Here is some of what they said. “The number of people who are uninsured would increase by 18 million in the first new plan year following enactment of the bill. Later, after the elimination of the ACA’s expansion of Medicaid eligibility and of subsidies for insurance purchased through the ACA marketplaces, that number would increase to 27 million, and then to 32 million in 2026. That first year increase in the uninsured population would consist of about 10 million fewer people with coverage obtained in the nongroup market, roughly 5 million fewer people with coverage under Medicaid, and about 3 million fewer people with employment- based coverage.

The Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015, H.R. 3762 would make two primary sets of changes that would affect insurance coverage and premiums. First, upon enactment, the bill would eliminate penalties associated with the requirements that most people obtain health insurance (also known as the individual mandate) and that large employers offer their employees health insurance that meets specified standards (also known as the employer mandate). Second, beginning roughly two years after enactment, the bill would also eliminate the ACA’s expansion of Medicaid eligibility and the subsidies available to people who purchase health insurance through a marketplace established by the ACA.

H.R. 3762 also contains other provisions that would have smaller effects on coverage and premiums. Insurers who sell plans either through the marketplaces or directly to consumers are required to: provide specific benefits and amounts of coverage; not deny coverage or vary premiums because of an enrollee’s health status or limit coverage because of preexisting medical conditions; and vary premiums only on the basis of age, tobacco use, and geographic location.

Eliminating the penalty for not having health insurance would reduce enrollment and raise premiums in the nongroup market. Eliminating subsidies for insurance purchased through the market- places would have the same effects because it would result in a large price increase for many people. Not only would enrollment decline, but the people who would be most likely to remain enrolled would tend to be less healthy (and therefore more willing to pay higher premiums). Thus, average health care costs among the people retaining coverage would be higher, and insurers would have to raise premiums in the nongroup market to cover those higher costs. CBO and JCT expect that enrollment would continue to drop and premiums would continue to increase in each subsequent year.

After weighing the evidence from prior state-level reforms and input from experts and market participants, CBO and JCT estimate that about half of the nation’s population lives in areas that would have no insurer participating in the nongroup market in the first year after the repeal of the marketplace subsidies took effect, and that share would continue to increase, extending to about three-quarters of the population by 2026. That contraction of the market would most directly affect people without access to employment-based coverage or public health insurance.”

So those are nonpartisan facts. As individuals begin to absorb these facts, there has been an initial backlash. It has become clear to residents and clients of rural hospitals that their local institutions are directly and negatively impacted by repeal. The ACA expanded Medicaid to tens of thousands of previously uninsured patients, providing new revenue streams for rural hospitals, which often serve a poorer, sicker patient population. The law also created a program that allowed some of these facilities to buy prescription drugs at a discount. So repeal creates real problems.

For example in Pennsylvania, 625,000 people enrolled in the expanded Medicaid program. Close to 300,000 came from rural areas, according to the Hospital and Health System Association of Pennsylvania. As of October, about 42,700 of Fayette County PA’s residents had Medicaid, according to state data, an increase of about 8 percent from 39,460 in June 2015. (Pennsylvania’s Medicaid expansion took effect in January of that year.) That’s close to one-third of the county’s population.

So the potential for real impacts are apparent. Lack of coverage or the perception of lack of coverage will cause real problems for rural and community providers and the patients they serve. Republicans know this hence the emphasis even during the current confirmation process of the HHS secretary nominee by them that the implementation of the terms of repeal will be over an extended period. All this does is create great uncertainty and instability for the sector. This can only be negative for those institutions and their creditworthiness.

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 January 17, 2017

Joseph Krist

Municipal Credit Consultant












In the grand scheme of things, the announced departure of the San Diego Chargers for Los Angeles doesn’t amount to much as a municipal credit event. If anything, it may be a positive for the city. The team’s presence ranked very low in terms of impact on things like hotel occupancy and restaurant patronage versus the league’s other teams. The winter climate certainly won’t change because the team left. And the city had seen the team make only one Super Bowl appearance in its history since when it moved to San Diego from yes, L.A. in 1961.

The Chargers have a contract with the City of San Diego to play at Qualcomm Stadium that runs through the 2020 season. They have a four-month window that begins Feb. 1 and ends May 1 to opt out of the team’s lease at Qualcomm Stadium. By ending the lease early, they will pay the City $12 million for the buyout. Now that they are leaving, Mayor Kevin Faulconer has proposed increasing the city’s hotel room tax via a public ballot measure in 2018, to finance a long-sought expansion of the San Diego Convention Center. The exact percentage amount, a project financing plan and other details would need to be determined through upcoming discussions involving the Mayor’s Office, City Council, the Port of San Diego, and hotel and tourism officials.

California law requires that tax hike measures geared to raising money for specific projects obtain at least two-thirds support of voters. This the same standard which this past November’s initiative had to meet. Guests at San Diego hotels currently pay a 10.5 percent transient occupancy tax, which goes to the city’s general fund for basic services; plus a 2 percent assessment that goes specifically toward local tourism programs.

Officials of San Diego Tourism Authority and San Diego Convention Center Corp. quickly voiced support for the mayor’s proposal, noting that events at the waterfront facility generated $1.1 billion in regional impact and $23.9 million in hotel and sales tax revenue during the past fiscal year. Officials said an expansion is needed to attract and retain large gatherings. The latest effort to expand the facility dates back around five years, and the latest cost estimate is $520 million. The project’s original funding plan was struck down by the courts, and a decision is pending in another case challenging the project’s 2013 approval by the California Coastal Commission.

I’m looking really hard for the credit downside here but I’m having a really hard time finding it. And as for public stadium financing, L.A. gets two teams with limited cash outlays and Las Vegas’ hockey team will play in a privately financed arena. There’s at least one sector where the private approach may start a trend. We do note that stadium construction is one item that supposedly fits into President trump’s idea of infrastructure.


A State of the State address is often the vehicle by which many governors effectively make their initial budget proposals. Just two weeks after advising the incoming Trump administration to follow his failing tax cut policy for economic development, Gov. Sam Brownback  of Kansas supported an increase in alcohol and tobacco taxes and proposed taking more money from the State’s highway fund to help avert a projected shortfall of more than $900 million over 18 months. Well that’s at least one approach to infrastructure.

Showing a real sense of vision and responsibility as he approaches the back end of his term limited tenure (not really), he also supported a plan to liquidate a long-term investment fund and sell off the state’s future payment stream received under the Master Settlement Agreement from tobacco companies to get cash now. While emptying the tool box of one time revenues, he wants to preserve a key income tax exemption for certain businesses that a growing number of lawmakers seek to repeal. The state receives approximately $60 million annually from the MSA. Under Brownback’s plan, the state would forgo that payment in the next 30 years in exchange for cash now — an estimated $530 million over two years.
Yet another proposal that puts paid to the theory of supply side economics at least in Kansas, is a proposal to increase taxes by $377 million over two years. He would double the tax on liquor in July to 16 percent and increase the tax on cigarettes by one dollar a pack to $2.29. He also would double the tax rate on other tobacco products to 20 percent. Brownback tried to get a similar tax increase for cigarettes and a liquor tax of 12 percent enacted in 2015. The Legislature approved a 50-cent-a-pack increase for cigarettes that year. Another crack in the theory is reflected in the proposal by the governor to freeze the income tax rate for the lowest tax bracket at 2.7 percent instead of letting it drop to 2.6 percent in 2018.

He still apparently considers his income tax exemption for limited liability companies, S corporations and other closely held businesses to be untouchable. Many legislators would support repeal. Repealing the exemption entirely would bring in about $250 million. He  also proposed taxing rents and royalties to bring in $40 million a year. At the same time he would  increase the annual filing fee for for-profit entities from $40 to $200.

Under these proposals, the governor’s office estimates, the state would have $216 million in its general fund at the end of June 2018. To fill the current fiscal year’s shortfall of more than $340 million, Brownback wants to liquidate the state’s long-term investment fund. The state invests idle funds from state agencies every year. The governor can unilaterally use some $45 million from the fund, which represents investment profits, but will need the Legislature’s approval to take $317 million in principal. Brownback proposes paying back the fund over seven years.

Once again, the governor also wants to freeze the state’s contribution to KPERS, the state employees’ pension fund, at 2016 rates, which would allow it to keep $85 million. Under that plan, it would take another 10 years to pay down the state’s unfunded pension liability. If lawmakers agree to these proposals, the state would have roughly $99 million in its general fund at the end of June. If he succeeds in reducing liquidity, increasing unfunded pension liabilities, and increasing one shot revenues, it is hard to see how the State’s ratings can be maintained.


The City of Dallas saw S&P downgrade the City’s general obligation bonds from AA to AA-, with a negative outlook. S&P also downgraded the Dallas Convention Hotel Development Corporations bonds from A to A-, with a negative outlook. S&P affirmed its A rating for the Downtown Dallas Development Authority, with a stable outlook.  S&P said that despite the City’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, the continued deterioration in the funded status of the Dallas Police and Fire Pension negatively affects the City’s creditworthiness.

The City’s official response came from Chief Financial Officer Elizabeth Reich: “S&P’s actions today are not a surprise.  The more the rating agencies learn about the crisis facing Dallas as a result of the police and fire pension, the more they understand what the City has been saying for some time – the pension is a significant risk to the fiscal health of the City.” Legislature to provide a secure, stable retirement for our public safety workforce, and to reaffirm the City’s sovereign immunity.  Our plan to save the pension does not request state funds.  We will continue to work to reach agreement with the Pension system.

“Dallas is a thriving City, our economy is strong, and our residents want safe neighborhoods and effective City services.  The taxpayers are willing to contribute to this fix, but unless the Legislature gives the City the tools to fix its pension issues, massive tax hikes, continued street deterioration, and drastic reductions in all other City services would be the only way to resolve the pension crisis without seeking Federal judicial relief.”

What we find most interesting is that the CFO statement essentially parrots what regular MCN readers have already been told since the early fall of 2016. We are glad to see those viewpoints affirmed. As we have said, there is much pressure on the state legislature to pass enabling legislation to facilitate the changes which must be made to maintain credit quality.


It may be hard to appreciate if your home is one of the ones in the photos of flooded ones but the Golden State seems to have received some real water supply relief from a recent combination of huge snow and rain events. Water came to many areas of the West due to this week of moisture-laden Pacific storms and an already wet Water Year (WY). California was the greatest recipient of drought improvements this week. With more than 2 inches of precipitation falling from southwestern Washington southward to Los Angeles, CA, including over a foot along the northern and central California coast and on the Sierra Nevada range, significant increases were made to the capacity of the state’s major reservoirs as most were above the normal Jan. 10 historic levels and still filling with most USGS monitored streams at near or at record high flows.

The state’s Sierra snow water content (SWC) was also well above its Jan. 10 normal, with the north (13.5”, or 111%), central (16.9”, or 130%), and south (17.9”, or 171%) producing a state average of 16.2”, or 135%. The Northern Sierra, San Joaquin, and Tulare basin station precipitation indices all exceeded their wettest year (1982-83; 1968-69 for Tulare) as of January 10 with 41.9 (203%), 30.8” (199%), and 20.0 (190%) inches, respectively. In fact, the Northern Sierra index gained 13.2 inches since Jan. 1, or 26% of its ANNUAL average in 10 days. Oroville Reservoir started the New Year with a deficit in its conservation pool of 750,000 acre-feet, but has gained 350,000 acre-feet in the past 2 days. Since northern portions of California also benefited from a decent Water Year last year, 1- to 2-category improvements were made.

In contrast, with long-term drought impacts more severe and widespread in southern sections since the 2015-16 WY marked its fifth consecutive year of drought, only a 1-category improvement was made to most areas since above ground (reservoirs) and underground (wells) water supplies still lagged below normal. And in southern Santa Barbara, Ventura, southern Kern, and northwestern Los Angeles counties, drought levels remained intact as the WYTD has been below normal while hydrologic impacts lingered. For example, Lake Cachuma (205,000 acre-feet facility) currently has 16,386 acre-feet, including a measly 191 acre-feet gained during the past 2 days. Lakes Casitas and Piru in Ventura County and several reservoirs in Los Angeles County are still well below normal and have not received any recharge. Lastly, even with the rains, no stream flows have been generated in the Santa Ynez, Ventura, and Santa Clara watersheds.


Last week it became apparent that a special session may be just around the corner for the legislature in Louisiana. The state lawmakers embraced a reality they avoided a month ago. The state is short $313 million for the current fiscal year, which ends on June 30th. State economists say the state’s still struggling economy is fueling the shortfall as the state has lost jobs each month since last August. As a result, income tax and sales tax are generating less money for the state than expected. Corporate tax returns are also down.

The Governor’s office is preparing for an emergency special session to address the budget mess, saying the state constitution restricts what can be cut outside of a special session. Governor Edwards, a Democrat, and others have been discussing the potential need for a special session for several weeks, even as some Republicans have downplayed the prospect of one. Edwards said he believes a $300 million or more deficit would automatically trigger the need for a special session because it would exceed the amount he is able to cut from the budget on his own.

One advantage of a special session is that it would allow more flexibility in. “I’m confined to a narrow spectrum of the budget as to where I can make adjustments,” Edwards said, referring to the legal framework for how to handle balancing the budget when legislators are not officially meeting. “If we have a special session, every part of the budget, including the judiciary and legislative budget can be opened up. That’s a much more responsible approach than just hammering the hell out of higher education and health care.”

The problem comes despite the fact that Edwards and lawmakers have made $850 million in cuts to the state budget over the past year. The Legislature also increased the sales tax to generate $1.2 billion in additional revenue and approved an increase in the cigarette tax during the special sessions. A panel that sets the state’s revenue forecasts will ultimately decide the size of Louisiana’s latest fiscal hole, based on advice from the state’s economists.


There are signs that the Illinois legislature is trying to create the framework for a “grand bargain” to resolve the existing standoff between it and the Governor. Some of the aspects include an increase in the personal income tax rate from 3.75 percent to 4.95 percent, a plan to generate $4.1 billion a year. With spending cuts, Democrats argue, that could eliminate what the governor’s office estimates will be a $5.3 billion deficit on the June 30 end of the fiscal year. There would also be an unspecified amount of borrowing to pay down debt. In actuality it is borrowing for operations. The legislation would allow Illinois to borrow $7 billion by selling bonds to pay off overdue bills, which on Friday totaled $10.7 billion. The loan would get the state back to paying vendors and service providers within 30 days of receiving their bills.

The plan includes $694 million to cover expenses for the first half of 2017 for seven agencies, including prisons and the Human Services Department. A six-month, temporary budget agreed to last summer expired Jan. 1 and the state is back to operating without appropriations. The deal would eliminate pensions for future legislators. It aims to save up to $1 billion a year by offering what House Speaker Cullerton has termed “consideration” — essentially a choice between how future pay raises figure into retirement income or whether pensioners receive cost-of-living adjustments in retirement. The measure would move Chicago’s responsibility for paying the employer’s portion of teachers’ pensions to the state — a $215 million obligation for 2017 alone. That would remedy a long-running complaint about fairness, since the state already picks up the employer share for teachers outside the city.

The bargain would again look to gaming for revenue. It would create a land-based casino in Chicago and add riverboat casinos in Lake County, Rockford, the south suburbs of Chicago, Danville, and in Williamson County, in southern Illinois, as well as giving horse racing tracks a piece of the action by permitting slot machines at Arlington Heights, Cicero and Collinsville.

In a nod to labor interests, Democrats have argued they made important changes to the injured-workers program in 2011 and that the insurance industry hadn’t caught up to those cost-saving measures. This plan would further restrict claims when injuries are accidents, set maximum compensation rates, and limit physical therapy, among other things. The minimum wage would be raised from $8.25 an hour to $9 on July 1, then by 50 cents each year until 2021, when it will be $11. According to the U.S. Labor Department, the wage exceeds $8.25 in 21 places outside Illinois, including the District of Columbia, which is highest at $11.50.


LADWP is in the process of issuing half a billion dollars of revenue bonds. So given the interest in the subject over recent days and weeks, we took a glance at the POS for a discussion of cybersecurity as an issue for investors to consider. Given the potential damage such an act could o to distribution capabilities, we would think that it could have financial risk implications at least equal to natural disasters or litigation related to dairy cows.

So we were a little disappointed to see in the discussion of factors affecting the electric industry only a five word reference to terrorism or cyberterrorism. We did not expect a truly extensive discussion but the lack of any is part of why we choose to focus some attention on it. We will continue to do so on a regular basis. We’d like to think that is would not require a major disruptive event to focus concern about it among investors. And we think that the risk (because it is truly unknown) is right up there with natural disasters that folks seem to take a bit more seriously.

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 January 12, 2017

Joseph Krist

Municipal Credit Consultant











Moody’s Investors Service has placed the ratings of 8 local government obligors on review with direction uncertain, affecting approximately $382.3 million of outstanding debt. In addition, the City of Ithaca, NY’s MIG 1 BAN rating has been placed on review for possible downgrade. The review is prompted by the lack of sufficient, current financial information. If the information is not received over the next 30 days, Moody’s will take appropriate rating action which could include the withdrawal or lowering of the ratings.

The action reflects a continuing crackdown by Moody’s against issuers who are unable or unwilling to provide complete, accurate, and timely financial information to support their ratings.  These actions have been welcomed by the investment community and ratings, especially those of smaller and infrequent issuers.

This round includes the following credits: Hampton (Town of) NH, Blooming Grove (Town of) NY, Bridgehampton Fire District, NY, Ithaca (City of) NY, Montebello (Village of) NY, Ramapo (Town of) NY, St. Lawrence (County of) NY, Northampton (Borough of) PA. The Town of Ramapo has a developing outlook reflecting uncertainty around the eventual outcome of the federal charges, including the possibility that the town’s financial position could be materially different than what was presented in previous audited financial statements.


Governor Edmund G. Brown Jr. today proposed a balanced state budget that eliminates a projected $2 billion deficit and bolsters the state’s Rainy Day Fund while continuing to invest in education, health care expansion and other core programs. In a letter to the Legislature, the Governor explained that while this year’s budget “protects our most important achievements,” it is also “the most difficult that we have faced since 2012” and “uncertainty about the future makes acting responsibly now even more important.”

Significant details of the Governor’s 2017-18 State Budget include: Without corrective action, this year’s budget would face a deficit of $1.6 billion, or 1.3 percent of annual spending. Without action, the state would face annual deficits into the future of about $1 to $2 billion. The two main factors causing this deficit are a revenue forecast that is $5.8 billion lower than expected and a current year shortfall in the Medi‑Cal program. The deficit would be billions worse if not for the passage of a number of ballot measures at the November election, including Proposition 52 (hospital fee), Proposition 56 (tobacco tax), and Proposition 57 (prison reform). Proposition 55’s extension of temporary income tax rates on the wealthiest Californians will begin to help balance the budget in 2018‑19.

As the economy and revenues were surging in recent years, budgets consistently upgraded revenue forecasts from the prior year. Yet, now, the January Budget is the second straight downgrade of revenue expectations over the past 12 months. The Budget reflects a revised revenue forecast that is $5.8 billion lower for 2015‑16 through 2017‑18. This represents a modest adjustment to expectations compared to the 2016 Budget Act—1.6 percent lower over the three years of revenues. Across the board, each of the state’s “big three” revenues — the income, sales, and corporation taxes — are showing weakness.

The budget proposes $3.2 billion in solutions to ensure a balanced budget. By tempering spending growth rather than cutting existing program levels, these actions minimize the negative effects on Californians. The solutions include adjusting Proposition 98 spending, recapturing unspent allocations from 2016 and constraining some projected spending growth. In total, General Fund spending remains flat compared to 2016-17.

Proposition 2 establishes a constitutional goal of having 10 percent of tax revenues in the state’s Rainy Day Fund. With a $1.15 billion deposit in the budget, the Rainy Day Fund will total $7.9 billion by the end of 2017-18, 63 percent of the constitutional target. While a full Rainy Day Fund might not eliminate the need for further spending reductions in case of a recession or major federal policy changes, saving now would allow the state to soften the magnitude and length of necessary cuts.

K-14 funding is expected to grow to $73.5 billion in 2017-18, up 55 percent – or $26.2 billion – from 2011-12. For K-12 schools, funding levels will increase by about $3,900 per student in 2017-18, over 2011-12 levels. Under the optional expansion provisions of the federal Affordable Care Act, the budget increases enrollment of this Medi-Cal population to 4.1 million Californians, with the state’s General Fund share of cost increasing from $888 million to nearly $1.6 billion.
Annual maintenance and repairs of California’s highways, roads and bridges are billions of dollars more than can be funded annually within existing revenues. The budget reflects the Governor’s transportation package, first proposed in September 2015, which would provide $4.2 billion annually to improve the maintenance of highways and local roads, expand public transit and strengthen critical trade routes.

All of this assumes that federal actions in terms of potential tax reform, healthcare changes, and other policy changes do not negatively impact the state. The reality that they most likely will. As such, the May revision to the budget will likely represent a substantial change from this blueprint and the final budget actually adopted could easily change again. It has been estimated that up to one-third of California’s budget is exposed to substantial potential impact from possible federal actions under a Trump administration and the new Congress.


It will be nearly one month until Gov. Tom Wolf will formally present his proposed executive budget for fiscal 2018 but he did recently offer extensive comments to the press on his views of the environment for that budget in an interview with the Scranton Times Tribune which we summarize and excerpt.

Pennsylvania’s distressed cities can be helped by a three-pronged approach of providing school property tax relief, targeting state economic aid and easing municipal pension debt, Gov. Tom Wolf said.  He said there’s real interest in Harrisburg in achieving property tax relief and the key to success is getting a bill in the right form. It would help cities like Scranton by cutting the biggest tax bill that residents pay. “Places like Scranton would see a big drop in the tax bill and a big increase in property values,” said Mr. Wolf.

The House passed a bill last session to replace nearly $5 billion worth of property taxes with higher state income and sales taxes while the Senate narrowly rejected a bill to mostly eliminate property taxes with that same combination of higher state taxes. As examples of how state government can target aid to cities, Mr. Wolf cited recent grants of $2.5 million for a medical complex corridor in West Scranton, $2 million for the Innovation Squared program in downtown Wilkes-Barre and $3 million for the “Cornerstone Commons” project at Lackawanna College in Scranton through the Redevelopment Assistance Capital Program.

He said the state needs to be a partner in helping cities like Scranton escape from municipal pension debt. Bills to increase state oversight of troubled municipal pension systems didn’t advance beyond the committee level last session.

The governor said he has been able to work with GOP lawmakers in recent months on education funding and tackling the opioid abuse epidemic. Of note is the fact that Mr. Wolf said he won’t call for hikes in broad-based state taxes for the fiscal 2017-18 budget, thereby removing a major sticking point with GOP lawmakers that fueled a lengthy budget stalemate in his first year in office.

Mr. Wolf also discussed with the newspaper his stance on school aid, a severance tax and health care. State education spending has been restored to the level of fiscal 2011-12, before a wave of cuts, but he said that more needs to be done to help public schools, early education programs and community colleges and career programs. Having a state severance tax on natural gas production would help gas drillers win acceptance from residents living in regions of Pennsylvania that don’t have drilling yet face pipeline development. The MCN has discussed the peculiarity of the Commonwealth’s lack of a severance tax given the role of the fracking industry in the Commonwealth (see December 8, 2016 MCN).

In the face of the upcoming Congressional debate over the ACA and its potential replacement, the governor said he will do his best to protect some 700,000 Pennsylvanians receiving health care through an expansion of federally funded Medicaid as a GOP-controlled Washington vows to scrap the federal Affordable Care Act. Readers are referred to our January 3, 2017 MCN where we highlighted Temple University Health System’s role as a huge Medicaid provider.

Mr. Wolf’s comments came on the opening day of the 2017-18 legislative session amid a backdrop of expanded Republican majorities in the House and Senate.


In our last issue, we highlighted the Port Authority’s upcoming 10 year capital program. So it was disturbing that right after we went to press, the Securities and Exchange Commission announced that the Port Authority of New York and New Jersey has agreed to admit wrongdoing and pay a $400,000 penalty to settle charges that it was aware of risks to a series of New Jersey roadway projects but failed to inform investors purchasing the bonds that would fund them.

The SEC’s order finds that the Port Authority offered and sold $2.3 billion worth of bonds to investors despite internal discussions about whether certain projects outlined in offering documents, including the Pulaski Skyway, ventured outside its mandate and potentially weren’t legal to pursue.  One internal memo noted, “There is no clear path to legislative authority to undertake such projects.” Another memo explicitly identified “the risk of a successful challenge by the bondholders and investors” in connection with the funding of the roadway projects.  But the Port Authority omitted any mention in its offering documents about these risks surrounding its ability to fund the projects.  Its offering documents stated that it issued bonds “only for purposes for which the Port Authority is authorized by law to issue bonds.”

“The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest.”

The Port Authority is the first municipal issuer to admit wrongdoing in an SEC enforcement action. The SEC’s order finds that the Port Authority violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  The SEC’s order acknowledges the Port Authority’s cooperation and prompt remedial acts.  The projects at issue have proceeded as planned.

We do note that, at least in the NY/NJ metro area, there was very extensive press coverage of the fact that Gov. Christie’s use of the Port Authority to fund the Pulaski Skyway project was highly controversial and possibly illegal as the sale process was unfolding. Institutional investors certainly were aware of the risk at the time of sale.


Learning anything about a Trump administration’s plans for the future from the current Senate confirmation hearings has been well nigh impossible. In the case of infrastructure, it’s a real struggle if proposed Transportation Secretary Chao’s responses are any indication. We did not hear confirmation of whether she favors the private sector to deliver infrastructure projects. We also learned nothing about what the administration considers infrastructure to be.

We do know however, what some sense of the Senate is. Ted Cruz advocates that the apportionment formula be adjusted to benefit Texas. Sen. Cory Booker thinks that that the Hudson River Tunnels carried the entire population of South Dakota between New York and New Jersey every day when the actual levels are some 20% of that number. Alaska Sen. Dan Sullivan cited how few roads his state had—fewer miles than Texas and even Connecticut—despite its size. I’ve been to Alaska and there aren’t many people to drive there.

West Virginia Sen. Shelley Moore Capito expressed that she was “concerned about how we’re going to be able to incentivize the private dollars to go to the less populated, less economically developed areas of our country?” And weighing in for the aforementioned South Dakota was its Sen. Thune who said “the urban-rural thing is my version of bipartisanship.” For those of us interested in infrastructure and its implications for municipal credit, it was not a hopeful exercise.


As we go to press, Illinois Governor Bruce Rauner has signaled a likely veto of newly passed legislation to stave off possible insolvency for two of Chicago’s pension funds. This will simply increase the pressure on the city’s ratings should it come to pass and further poison the state’s already toxic budget environment.

By a 41-0 vote, the Illinois Senate approved the proposed rescue, which cleared the House overwhelming in December. The plan would authorize new city funding for Chicago’s municipal and laborers retirement systems. As we have noted on multiple occasions, the systems are projected to run out of money in the coming decade and were depending on legislative sign-off of the city’s enactment of a water and sewer usage tax and telephone surcharge designed to help get them 90 percent funded in 40 years. City officials have acknowledged that more money will be needed starting in 2023 when payments will reach actuarially required levels.

“The bill essentially authorizes another property tax hike on the people of Chicago and sets a funding cliff five years out without any assurances that the city can meet its obligations,” the Governor’s spokeswoman said in a statement. “The governor cannot support this bill without real pension reform that protects taxpayers.” It’s not clear that this is news to anyone who follows Chicago’s finances and it is less clear how this contributes to a resolution of the state’s many other problems given that it is the Chicago Board of Alderman who take the real political hit.

Meanwhile, a bipartisan, statewide fix to Illinois’ $129.8 pension crisis did not get called for a vote in the Illinois Senate as part of a legislative plan to end an 18-month budget stalemate, pass non-budgetary reforms sought by Rauner and expand casino gambling, among other things. On a separate budgetary track, the House approved a $657.3 million appropriation plan for universities and social service agencies that lost spending authority on Jan. 1. The House-passed legislation that would fund operations through June awaits Senate approval, but Rauner has expressed past reluctance to support new stopgap spending without other reforms. A veto on the Chicago plan will serve to nearly ensure that those reforms won’t happen.


The City of New York’s tobacco securitization entity, TSASC, is planning to issue $495 million of subordinate tobacco securitization bonds. The deal was originally expected to close in November, 2016 but a several factors outside of a rise in interest rates intervened to make a closing at that time less feasible. These most prominently include a proposal by BAT (British American Tobacco) to purchase all of the stock of Reynolds American not already owned by BAT. Reynolds was an original producing manufacturer (OPM) under the Master Settlement Agreement securing the revenues pledged as security by issuers of tobacco bonds. Reynolds rejected BAT’s initial offer but would consider a higher offer.

It matters because such a transaction would increase the concentration risk related to  the financial ability of fewer but larger contributors to the settlement payment requirements. We don’t view this as a significant increase in the overall risk profile of tobacco bonds but ones as to which investors should make their own judgment as to how much industry concentration with which they are comfortable.

The deal represents the first substantial tobacco offering in an environment in which investors have received positive high yield returns and the sector is seeing positive flows after an extended period of the reverse. The subordinated bonds in this issue are unrated. We have always taken the position that senior lien tobacco debt from any issuer represents a speculative investment and one subject to valuation volatility. We believe that unrated subordinated tobacco debt carries with it those characteristics at a much higher level. As such, these bonds remains best appropriate as an institutional trading vehicle rather than an attractive opportunity for individuals.

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 January 10, 2017

Joseph Krist

Municipal Credit Consultant









The administration of Gov. Andrew M. Cuomo indicated that it is ready to move ahead with a proposal to cover tuition costs at state colleges for hundreds of thousands of middle-and low-income New Yorkers. Under the governor’s plan, college students who have been accepted to a state or city university in New York (this includes two-year community colleges) would be eligible, provided they or their family earn $125,000 or less a year.

A plan like that would reflect proposals made during the 2016 Democratic primary by Senator Bernie Sanders of Vermont. If the proposal goes forward, it would establish New York at the forefront of such efforts; Tennessee and Oregon have programs to cover the costs of community college. The governor’s plan would include four-year schools, including dozens of campuses that are part of the state university system, as well as the city’s university system. CUNY was originally a free system.

Under the proposal, the state would complete students’ tuition payments by supplementing existing state and federal grant programs — essentially covering the balance, though administration officials said some students could have their entire four-year education covered. Mr. Cuomo hopes for enactment in the upcoming FY 2018 budget for his idea, with a three-year rollout beginning in the fall, with a $100,000 income limit, rising to $125,000 by 2019.

Initial estimates provided by the administration said the program would allow nearly a million New York families with college-age children, or independent adults, to qualify. The actual number of students receiving tuition-free education would probably be about 200,000 by the time it was fully enacted in 2019, according to the director of state operations. The administration estimated that the state’s annual budget outlay would be $163 million by 2019, though it acknowledged that estimate could be affected by participation and level of need. Costs for the state could also rise as enrollment rises. Some 400,000 students attend state or city universities full time, but the administration projects that the lure of a tuition-free system could increase the student population by 10 percent by 2019.

At present, New York offers in-state students one of the lowest tuition rates in the nation. Current full-time tuition at four-year State University of New York schools for tuition-and-fees is $6,470; at two-year community colleges, the cost is $4,350. Full-time costs for City University of New York schools are about the same. The state also provides nearly $1 billion in support through its longstanding tuition assistance program, which has an adjusted gross income limit of just under $100,000. Those awards top out at $5,165; many grants are smaller.

The plan has the potential to serve as a real support to upstate economies in a number of ways. It would increase the quality of the workforce. It would also serve as a support to employment at the state university system campuses. By increasing the attractiveness of the workforce it could also stabilize the declining upstate population and inject some youth into upstate demographics.


The Center for Retirement Research at Boston College is a great source of data on public pension systems across the country. This month it has released a study which compares the reform patterns for over 200 major state and local plans between 2009 and 2014 and investigates how and why the changes were made. The study covers all 114 state plans and 46 local plans from the Public Plans Database (PPD) and an additional 86 local plans. In total, the sample includes the major plans for every state. According to the study, 74 percent of state plans made some type of reduction compared to 57 percent of local plans. Second, while the majority of plans reduced benefits only for new employees, about one-quarter also cut benefits for current employees.

The following table from the report describes the legal constraints on changing pension systems.

Table 1. Legal Basis for Protection of Public Pension Rights under State  Laws

Benefit accruals protected

Legal basis Past and future Past and maybe future Past only                       None
State constitution AK, IL, NY AZ HI, LA, MI
Contract CA, GA, KS, MA, NE, NH,




Property ME, WY CT, NM WI, OH
Promissory estoppel MN
Gratuity IN, TX

Promissory estoppel is the protection of a promise even where no contract has been explicitly stated.

In Texas, this gratuity approach applies only to state-administered plans. Accruals in many locally-administered plans are protected under the Texas constitution.

Sources: Munnell and Quinby (2012); and subsequent communications with plan administrators and legal experts.

This next table, also from that report, indicates the some of the jurisdictions where changes have been made and the nature of those changes.


Table A1. Plans Making Changes to Current Employee Core Benefits, 2009-2014  Core Benefits, 2009-2014
Strength of protection
Plan name
Detroit Police and Fire Retirement System* Agreement reached after negotiations.
Detroit General Retirement System* City bankruptcy prompted vote by plan participants.
Fort Worth Employees’ Retirement Funda* Reforms apply to future service, ongoing litigation.
Contract: Past and future accruals
Vermont Teachers’ Retirement System Agreement reached after negotiations.
Contract: Past and maybe future accruals
Baltimore Fire and Police Employees’ Retirement System Passed after litigation.
Rhode Island Employees’ Retirement System* Reached settlement after litigation.b
Rhode Island Municipal Employees’ Retirement System* Reached settlement after litigation.b
Contract: Past accruals only
Arkansas Teacher Retirement System* Reforms apply to future service.
Lexington Policemen’s and Firefighters’ Retirement Fund* Accruals before retirement are not protected.
Miami Firefighters’ and Police Officers’ Retirement Trust Non-vested employees are not protected.
Newport News Employees’ Retirement Fund Reforms apply to future service.
North Dakota Teachers’ Retirement Fundc* No legal action.
Pensacola General Pension and Retirement Fund* Reforms apply to future service.
South Dakota Retirement System Reforms apply to future service.
Virginia Retirement Systemd Accruals before retirement are not protected.
Property-based approach: Past accruals only
Cincinnati Retirement System* Reached settlement after litigation.
Milwaukee County Employees’ Retirement System Reforms apply to future service.
Ohio Public Employees Retirement System* Accruals before retirement are not protected.

Our readers may notice that some of the leading “pension offenders” we referenced in our January 3, 2017 issue are not among the list of those who have made positive changes with those listed above. This information can serve as a starting point for investors concerned over the role of pension demands on the fiscal bases supporting their credit choices. Our thanks to the Center for Retirement Research at Boston College.


The commissioners of the Port Authority of New York and New Jersey approved a budget that determines how they would spend $32 billion over the next 10 years. The budget was not universally supported especially by some strenuous objections by lawmakers from  New Jersey who argued that the commissioners were shortchanging commuters from their state by including only $3.5 billion for a new bus terminal in Manhattan in their long-term capital plan. The bus terminal is expected to cost much more than that, possibly twice as much.

Gov. Cuomo wanted more of the budget for big projects to go toward improving the airports in New York City, so the budget that resulted was called a “grand compromise.” It allocates $1 billion for a plan to revamp Kennedy International Airport that Mr. Cuomo unveiled a day earlier. It also included about $1.5 billion for a train link between La Guardia Airport and the city’s subway system.

The agency’s chairman said there were no plans for toll increases above the rate of inflation over the next 10 years. That decision constrains the Authority in terms of how much debt it can support for projects over that period. The choices also included new train tunnels under the Hudson, an extension of the PATH train to Newark Liberty International Airport, an overhaul of Terminal A at Newark Liberty and the replacement of Terminals C and D at La Guardia.

The commissioners agreed to include all of those projects, but not to the tune that the New Jersey lawmakers wanted to hear. The lawmakers said they feared that budgeting only a portion of the estimated cost of a replacement for the Port Authority Bus Terminal, which serves 115,000 daily commuters would reduce its chances of timely completion. The project is also being criticized for its proposed location one block west of its current site which would make it less accessible to mass transit connections. The Port Authority will hold two public hearings on the capital plan — on Jan. 31 in Lower Manhattan and Feb. 7 in Jersey City — and before its board takes a final vote on it on Feb. 16.


The New York Times reports that the Indian Point nuclear plant will shut down by April 2021 under an agreement New York State reached with Entergy, the utility company that owns the facility in Westchester County, according to a person with direct knowledge of the deal. This despite the fact that the plant is an important supplier of inexpensive power to the metropolitan area. Its generating capacity of more than 2,000 megawatts is about one-fourth of the power consumed in New York City and Westchester County.

Under the terms of the agreement, one of the two nuclear reactors at Indian Point will permanently cease operations by April 2020, while the other must be closed by April 2021. The shutdown has long been a priority for Gov. Andrew M. Cuomo, who — though supportive of upstate nuclear plants — has repeatedly called for shutting down Indian Point, which many feel  poses too great a risk to New York City, less than 30 miles to the south. The governor’s office estimated that, at most, the proposed shutdown would add $3 a month to electric bills in the metropolitan area. Utility customers in New York City already pay rates that are higher than anywhere in the country, except Hawaii.

Political opposition to Indian Point, on the edge of the Hudson River in Buchanan, N.Y., has long emanated from both the public and elected officials.  Options for replacing that power are so far unclear, but potentially could include hydropower from Quebec and power from wind farms already operating across New York, according to the person. Unlike upstate nuclear facilities scheduled to receive operating subsidies under plans we detailed in the summer of 2016,the Indian Point facilities are not dominant employers in Westchester County in the way that the upstate plants are. The plant employs nearly 1,000 full-time workers, about 550 of whom are union members. Entergy estimated that its work force would shrink by about 20 percent, or about 200 jobs, in 2021. After the shutdowns, about 190 workers would stay on for the decommissioning process.

That is not to say that some underlying entities will not suffer a real fiscal and economic impact. Perhaps no single entity will suffer the financial effects of the shutdown more than Hendrick Hudson schools, a district with 2,400 students that draws from parts of a half-dozen towns and villages near the plant. The superintendent said taxes from the company that owns Indian Point, Entergy, made up one-third of the district’s $75.8 million operating budget annually. “We’ve enjoyed some of the lowest property tax increases of any school district in Westchester County and that has made this a very appealing community to move to and stay in,” he said. “Entergy plays a major, major role in keeping taxes down. If they are not operating at the capacity that we’re accustomed to, we are going to have budget deficits.”

Another aspect of the move is that State officials believe the agreement will help convince renewable energy providers that the state is serious about looking for new sources of energy. There is the risk however, that should a viable replacement source not materialize, ratepayers in New York City could face even  higher energy prices for years. The agreement also provides for flexibility if the state cannot find a replacement for Indian Point’s energy: The deadlines in 2020 and 2021 can be pushed to 2024 and 2025 if both the state and Entergy agree.

Entergy has been seeking a 20-year renewal of its license from the federal Nuclear Regulatory Commission since 2007. But New York State officials have challenged that renewal on several fronts and have refused to grant permits that they say the plant needs to continue operating. Leading that opposition has been NYS Attorney General Eric Schneiderman who has opposed Entergy’s relicensing bid in the courts, arguing that the plant poses safety and environmental hazards to the surrounding area; the agreement calls for Mr. Schneiderman to drop that challenge.


New York’s other major bridge and tunnel financier and operator, the Triborough Bridge and Tunnel Authority plans to issue new debt this month. The TBTA’s facilities include: Robert F. Kennedy Bridge (formerly the Triborough Bridge), Verrazano-Narrows Bridge, Bronx-Whitestone Bridge, Throgs Neck Bridge, Henry Hudson Bridge, Marine Parkway-Gil Hodges Memorial Bridge, Cross Bay Veterans Memorial Bridge, Hugh L. Carey Tunnel (formerly the Brooklyn-Battery Tunnel), and the Queens Midtown Tunnel. All are major links in the metropolitan area’s transit infrastructure and lucrative revenue sources to the Authority’s parent, the MTA.

When assessing the TBTA credit it is important to note its role as a source of subsidy to the MTA’s mass transit operations. The Authority’s toll rates are reflective not of the direct operating and maintenance needs of the TBTA facilities but of their relatively inelastic demand profiles. This enables the TBTA to charge relatively high tolls which then generate excess revenues for transfer to the MTA. Those tolls also fulfill a role in the attempt to reduce auto traffic into the borough of Manhattan.

Senior lien general revenue bonds secured by a first lien on net revenues of bridges and tunnels; subordinate lien by a second lien on net revenues. The bonds do not benefit from a debt service reserve fund. There is a rate covenant that requires net revenues to be maintained at 1.25x annual debt service for senior lien debt and a strong additional bonds test that requires net revenues to be 1.40 times debt service on outstanding and planned bonds if the bonds are not being issued to keep the facilities in good operating condition. Ratings reflect solid credit fundamentals and assume that the TBTA will continue to grow net revenues; prudently fund asset maintenance and support senior lien revenue DSCRs at or above the 1.75 times board adopted target and total DSCRs at or above 1.50 times.

The reality is that stated coverage levels from net revenues, the security for the TBTA revenue bonds, will always be robust. At the same time, every dollar of those revenues is spoken for from a management and budgeting standpoint. Nonetheless, the TBTA general revenue bonds remain a strong and consistent underlying credit.


The Puerto Rico government has formally requested the Financial Oversight & Management Board to extend the stay on litigation provided by the federal Promesa legislation, as well as the deadline for submitting a revised tax plan. In a letter dated January 4,signed by Elías Sánchez, the government’s representative before the board, the administration of Gov. Ricardo Rosselló said it wants to validate and update the fiscal information available to date, address its cash flow problem and resume negotiations in good faith with creditors. It gives three reasons for a delay.

“First, a January 31, 2017 deadline for achieving a certifiable fiscal plan is problematic because Governor Rosselló Nevares will only have been in office since January 2, 2017. Less than a month is simply not enough time for the New Administration’s appointees and the “high- level task force” (as suggested by the Oversight Board in the Letter) to fully and responsibly understand and assess Puerto Rico’s fiscal challenges. It would be far more helpful, as well as consistent with PROMESA, to allow the New Administration and the “task force” sufficient time to perform their responsibilities and to develop their own understanding of the situation so as to maximize the fiscal plan’s reliability and the Government’s autonomy.

Second, because the fiscal plan is the cornerstone of the restructuring process under PROMESA, developing the fiscal plan without leaving enough time to vet and finalize the underlying financial and economic data could lead to a flawed fiscal plan and undermine the success of any restructuring efforts. A rushed restructuring process not based upon a reliable and credible fiscal plan, even if certified, is a recipe for serial restructurings and could prevent Puerto Rico from achieving fiscal responsibility within 10 years.

Third, the Oversight Board’s fiscal plan deadline will undercut the New Administration’s ability to properly engage its creditors in good-faith negotiations to achieve a consensual restructuring of Puerto Rico’s debts. We note that there are 63 covered entities with multiple variations of debt held by different groups of bondholders with different and competing interests. Under Title II of PROMESA, the Government is responsible in the first instance to engage in good-faith negotiations aimed at achieving consensual voluntary agreements with its bondholders. ”

The letter goes on to say that although it may be difficult to achieve consensual Title VI voluntary agreements with every covered entity issuer, even within the time period suggested below, it will be important as a precursor to any restructuring action taken by or on behalf of the Government that various bondholder groups are given adequate financial information for productive dialogue. These discussions could lead to at least a short-term liquidity solution and/or forbearance of remedies, if not a longer term solution. For these reasons, the New Administration respectfully requests the Oversight Board to extend its January 31, 2017 deadline for submitting a certifiable fiscal plan by at least 45 days, subject to further reasonable extensions as may be necessary under the circumstances.

An extension to the stay on lawsuits against the government was also requested. Under federal law, the stay expires mid-February, but the oversight board can extend it for an additional 75 days. However, Promesa stipulates that such extension should be granted in order to provide time to finalize consensual agreements between the government and creditors. Were the stay’s extension not granted, the short time available would force the government to take the “bankruptcy route in court,” which was the past administration’s strategy, Sánchez explained.

While the letter acknowledges it will be difficult to reach voluntary agreements with each of the creditor groups, the extension would provide room for the government to provide more accurate information and provide a basis for constructive dialogue before any debt restructuring action. Although the oversight board published government figures last month after receiving information from the past administration, Sánchez said these “were preliminary, not final ones,” and that “the board itself in its last communication makes clear that they’re going to hire another group of external advisers to look at the numbers.”

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 January 5, 2017

Joseph Krist

Municipal Credit Consultant








———————————————————————————————————–THE LATEST IN P3 PROJECTS

Miami Beach officials are considering a plan for a South Beach streetcar line utilizing a public-private partnership (P3/PPP). The estimated cost of the project is $244 million. Officials originally planned for a loop around the center of South Beach, stretching from Beach High west on Dade Boulevard and south on Alton Road. Last month, that loop was cut in half because of rising costs and logistical issues. Commissioners heard public comments on the proposed line before a December meeting in which they voted unanimously Wednesday to temporarily stop the fast-tracked light rail project. The commissioners agreed to wait for Miami-Dade County commissioners to make a binding commitment to building a connection across Biscayne Bay, including a funding plan. A final contract for the project would also have to be approved by voters.

The Federal Transit Administration (FTA) and Maryland Transit Administration (MTA) wrote in filings submitted Friday in U.S. District Court in Washington, D.C., that even if no Metro riders used the Purple Line, the light-rail line would still have about 50,000 weekday riders by 2040, compared to the 69,300 currently projected. Ridership at that level would still be enough to meet the line’s purpose—to create a reliable east-west transit system between Montgomery and Prince George’s counties, according to the agencies.

The latest analysis was conducted to satisfy Judge Richard Leon’s November order in the suit brought by two Chevy Chase residents and the trail advocacy group Friends of the Capital Crescent Trail. Leon revoked the project’s federal approval in August andin November he asked the FTA and MTA to prepare a report about whether the agencies believe a new Supplemental Environmental Impact Statement, which would trigger a new public approval process, is needed because of Metro’s ongoing problems.

“There is no plausible basis for finding that reduced ridership (even if it were to occur) would create a seriously different picture of the environmental impacts of the Purple Line,” the MTA wrote in its court filing. The agency also said the analysis of Metro’s problems satisfies Leon’s order and asked the judge to reinstate federal approval of the project to allow construction to begin.

Responding Friday, the agencies said a new environmental study is not needed because even if there were to be a ridership decline on the Purple Line because fewer riders were transferring from Metro, it wouldn’t change the footprint of the project or its environmental impact. About 27 percent of the Purple Line’s ridership is expected to transfer from Metro.

“Potential effects that may result from a Purple Line ridership decline due to [Metro] issues would be minimal,” the FTA wrote in its filing. The agency also notes that federal law does not require it to analyze other alternatives—such as a Bus Rapid Transit line. Instead, it’s only required to consider the new information about Metro.

In addition to what the FTA considers to be the highly unlikely scenario of no Metro riders using the Purple Line, the agency also looked at four other scenarios to determine Metro’s potential impact on the Purple Line. The agency found: if Metrorail ridership grows by about 40 percent from 2018 to 2040, then Purple Line ridership would be estimated at 66,766 riders per weekday. If Metrorail ridership grows at about 20 percent from 2018 to 2040, then Purple Line ridership would be 64,463 per weekday. If Metrorail ridership stabilizes, but doesn’t grow from 2018 to 2040, then Purple Line ridership would be 62,768 per weekday. If Metrorail ridership continues to decline at the rate it has declined from 2008 to 2015—about 5 percent—then Purple Line ridership would be 60,276 per weekday.

Construction was scheduled to begin this year, but has been delayed due to the lawsuit. The Purple Line project director, wrote in a court document recently filed that further delaying the construction could cost the state $13 million per month and that an extended delay could cause the state to lose the $400 million it already invested in the project.

Now that the two transit agencies have responded to the order, the plaintiffs in the case have two weeks to respond to the motion. After that, the judge is expected to consider the arguments and issue a new ruling.


After twice vetoing similar measures, New Jersey Gov. Chris Christie at year end signed a bill that will require the state to make quarterly pension contributions, as opposed to one annual lump-sum payment. The bill cleared both state legislative chambers unanimously in November.

However, there’s skepticism around the new law because it still doesn’t require the state to make full payments — and New Jersey has historically shorted its contributions or skipped them entirely. The new law will require governor to make pension payments on a quarterly basis by Sept. 30, Dec. 31, March 31 and June 30 of each year, instead of at the end of the fiscal year in June. In exchange, the pension fund would reimburse state treasury for any losses incurred if the state has to borrow money to make a payment.

The Supreme Court of California has a case before it with the potential to alter the political and legal conversations about pensions in the Golden State and beyond. Sometime in the first half of the year, the court is expected to hear an appeal of a landmark pension ruling out of Marin County that challenges the decades-old precedent known as the “California Rule.”

An appellate court ruled unanimously in August that the Marin County Employees’ Retirement Association was free to modify the pension formula to reduce unearned benefits for current employees, a decision is at odds with the state Supreme Court’s 1955 ruling granting employees the right to continue earning pension benefits throughout their careers that are at least as good as those offered when they were hired.

A date for arguments has not been set, as the Supreme Court is waiting for another similar case from Alameda County to work its way through the appellate process before it takes up the question itself. The case arose in the aftermath of California’s Public Employees’ Pension Reform Act, or PEPRA, which took effect in January 2013.

The law was an effort by reform advocates to crack down on pension benefit “spiking,” which is the practice of inflating pension benefits by calculating things like unused vacation time or various bonuses into the formula at the end of an employee’s career to raise the amount employees are entitled to after retirement.

California Gov. Jerry Brown vigorously attacked spiking in supporting PEPRA, labeling the practice “abusive.” PEPRA said that pensions had to be calculated based only on an employees’ regular pay, but MCERA’s move to apply the anti-spiking change to existing employees rather than only new hires landed the issue in court.

Experts on pensions and bankruptcy said that the ruling has the potential to be far-reaching not only in how pension benefits are negotiated in California, but also in other states because of how influential the California Rule decision has been nationally.

In a May 2012 paper critical of the rule published in the Iowa Law Review it was noted that courts in at least twelve states have cited the California Rule in their own pension decisions. They include Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont, and Washington.

“In nearly all of these jurisdictions, the courts adopted the California Rule without much discussion, appearing to merely find it the most attractive of the available non-gratuity options,” according to the ILR paper. Some states went on to subsequently modify the rule, and some states, such as New Jersey, explicitly rejected it.

But the California Rule remains influential, and lawyers and pension reform advocates are closely watching the MCERA case to see if the state’s top judges, themselves public employees entitled to pensions, will alter the landscape Californians have been living with for 60 years. Even if the Supreme Court does rule that changes to the existing benefit formula are legal, it would not force those changes to be made. The Supreme Court could take several months to make a ruling even once oral arguments are held.


The Burlington VT Electric Department has acknowledged that a Russian campaign linked to recent cyberattacks had breached a single laptop within the utility, though it was not connected to the organization’s electrical grids. Does the breach signal vulnerabilities within the American electrical grid? The penetration, first reported by the Washington Post, which cited U.S. officials including at least one senior administration official, could be an attempt to test Russian capability to disrupt other utilities.

American officials believe a cyber-campaign against the U.S. energy industry in 2014 resulted in at least 17 companies’ systems being penetrated, including four electric utilities. The U.S. Department of Homeland Security has said the attackers in the 2014 blitz were able to steal data and gain private network access, which could allow them to remotely adjust equipment settings.

Such efforts have been a long term fear of industry professionals and antiterrorism professionals for the crippling impact on national life that an attack on America’s highly computer dependant and connected national utility grids could have. It makes sense that such efforts would start on a small scale. The limited scope of this event provides some comfort but not much in the grand scheme of things. It supports our view of the potential negative impact on smaller municipal operations.


Recently, the NYC Independent Budget Office said that Mayor de Blasio’s latest  financial  plan might   best be described as a placeholder. It recognizes some new spending needs, realizes additional federal and state support, and carves out some   savings in city spending. IBO estimates the city will end the current fiscal year  with  a surplus of  $801  million,  which is $362 million above the de Blasio Administration’s   estimate.

This surplus estimate does not include the $1.5 billion currently sitting in two reserves within the fiscal year 2017 budget—these reserves are counted as expenditures but  do  not  currently  support any specific spending needs. If these funds are not used to cover unexpected spending needs or revenue shortfalls, they will become part of the    surplus, which would more than suffice to close the $1.9 billion budget gap (3.0 percent of city-funded   expenditures) IBO forecasts for 2018.


Total Revenue and Expenditure Projections

Dollars in millions

2017 2018 2019 2020 Average Change
Total Revenue $83,884 $85,551 $88,916 $92,451 3.3%
Total    Taxes 54,232 57,174 60,043 63,019 5.1%
Total Expenditures 83,522 87,778 91,468 93,899 4.0%
IBO Surplus/(Gap) Projections $- ($1,865) ($2,551) ($1,448)
Adjusted for Prepayments and Debt Defeasances:
Total Expenditures $86,878 $88,415 $93,240 $95,678 3.3%
City-Funded Expenditures $62,430 $65,222 $68,036 $70,002 3.9%
NOTES:  IBO  projects   a   surplus   of   $801   million   for 2017,  $362  million  above  the  de  Blasio Administration’s forecast. The surplus  is  used  to prepay some 2018 expenditures, leaving 2017 with a balanced    budget.    Figures    may    not    add    due    to rounding.

New York City Independent Budget Office


Although IBO expects the  local  economy to continue to grow throughout the 2017- 2020 financial plan period, the pace will slow markedly from  the  last seven years of expansion. Following the record increase of nearly 140,000 new jobs created  in calendar year 2014, job growth slipped to  86,400 last  year.  The  city  has added 67,200 jobs  through the   first 10 months of this year—but with no net growth since July.

IBO’s forecast for 2018 and beyond  has far more uncertainties than   usual.   For    now    it is premised  on Congress agreeing to infrastructure spending and tax cuts, generating considerable fiscal  stimulus in 2018. In a forecast largely completed before the  presidential election,  IBO expects New York City’s economy to extend its long expansion through the financial plan period, but at an attenuated pace. The election itself has introduced the prospect of far-reaching changes in  federal policy  that   may   impact the city in a variety of ways, some positive, some negative, but at this point all remain highly uncertain. Individual and corporate tax cuts could boost the city economy, but if federal rate cuts are paid for in part by curbing  state and local tax deductibility,  that would work against the city, which disproportionately benefits from that deduction.

And insofar as federal tax cuts are not paid for, it is difficult to say how  a rapid escalation of debt will effect expectations of both national and local growth. The city economy might also be adversely affected by uncertainty about the future status of its large immigrant    population. There  is anecdotal evidence that this is already prompting a slowdown in nonessential spending in some city neighborhoods with heavy concentrations of undocumented residents.


On December 20, 2016, the Congressional Task Force on Economic Growth in Puerto Rico released is long awaited report containing its recommendations for what tax and legislative actions might be taken by the U.S. Congress to stimulate near-term economic growth in support of improved fiscal conditions for the Commonwealth of Puerto Rico. The report included a significant of information on Puerto Rico’s economic conditions which need not be reiterated here. Of more interest are some of the recommendations the Task force offers to address these ills.

The Task Force recommends that Congress enact fiscally-responsible legislation to address the impending Medicaid cliff established by the ACA. The Task Force recommends that Congress begin to address the funding issue early in calendar year 2017 to enable the Puerto Rico Medicaid agency to engage with more certainty when formulating capitation payment contracts with its managed care organizations for Puerto Rico Fiscal Year 2017-2018, which begins on July 1, 2017. In addition, the Task Force recommends that,  going forward, federal financing of the Medicaid programs in Puerto Rico and the other territories should be more closely tied to the size and needs of the territory’s low-income population.

The Task Force recommends that Congress amend federal law so that, going forward, Medicare beneficiaries in Puerto Rico are automatically enrolled in Medicare Part B with the option to opt out of coverage, the same way their counterparts in every state and other territory are treated.

As long as Puerto Rico remains the only U.S. jurisdiction where Medicare beneficiaries are required to opt in to Part B coverage, the Task Force recommends that the Centers for Medicare and Medicaid Services and the Social Security Administration take timely and targeted steps to educate island residents about the existence of the opt-in requirement and  the financial consequences of late enrollment.

The Task Force recommends that Congress amend Section 24 of the Internal Revenue Code to authorize otherwise eligible families in Puerto Rico with one child or two children to claim the additional child tax credit, with the amount of the credit equal to the amount of annual federal payroll taxes paid by the family or $1,000 per qualifying child,  whichever  is  lower. It has been estimated that this proposal could benefit about 355,000 newly- eligible families and 404,000 newly-eligible children in Puerto Rico, with an average credit for all Puerto Rico families of $770, which will help reduce child poverty on the island.

The Task Force recommends that Congress make the full amount of the rum cover-over payment to Puerto Rico and the U.S. Virgin Islands permanent, rather than permanent in part and subject to tax extenders legislation in part. The Task Force further recommends that Congress increase the cover-over payment from the current rate of $13.25 per proof gallon to the generally applicable distilled spirits rate, currently $13.50 per proof gallon. At a minimum, the Task Force recommends that Congress extend the additional $2.75 per proof gallon component of the rum cover-over payment beyond 2016. Failure to extend the provision will cause harm to Puerto Rico’s (and the U.S. Virgin Islands’) fiscal condition at a time when it is already in peril.

As long as the Section 199 domestic production activities deduction remains part of U.S. tax law, the Task Force believes that it should apply in Puerto Rico, a U.S. jurisdiction home to American workers. The Task Force recommends that Congress amend Section 199 so that it applies to Puerto Rico on a permanent basis.  At a minimum, the Task Force recommends  that Congress—for the sixth time since 2006—extend the provision beyond 2016.

The Task Force believes that the Puerto Rico Electric Power Authority’s record of service  has not inspired confidence among its customer base in Puerto Rico, and recommends that  the government of Puerto Rico continue efforts to make operational reforms at PREPA, improve the efficiency of electricity generation and transmission, and diversify Puerto Rico’s energy supply—all with the ultimate goal of making electric power more reliable and affordable.


While we maintain that large multi-state systems are better credits within the hospital sector, a road without bumps is not guaranteed by that structure. Trinity Health is one of the largest not-for-profit healthcare systems in the U.S. and represents the May 2013 merger of Trinity Health and Catholic Health East. The system operates over 90 hospitals in 22 states across the U.S. and is headquartered in Livonia, Michigan. Trinity is issuing four series of bonds to reimburse itself for prior capital expenditures and pay down a portion of its outstanding commercial paper.

All debt of the legacy organizations are secured on parity through a Master Trust Indenture. Trinity Health may not withdraw from the Obligated Group. The Credit Group consists of Members of the Obligated Group and the Designated Affiliates. The Designated Affiliates include the majority of the hospitals except for New York facilities and Mercy Chicago. The Obligated Group pledges to cause the Designated Affiliates to pay, loan or otherwise transfer to the Obligated Group such moneys as are necessary to pay amounts due on the bonds. Its pledge of revenue is derived from the operation of all facilities of the majority of the Designated Affiliates, including rights to receivable accounts and health care insurance receivables.

Its low AA ratings reflect several key strengths including the organization’s large size and geographic diversity across many markets, with broad diversity of revenue and cash flow. Key challenges include weaker performance in 2016 with expectations that it will take several years to return performance to prior levels. Additional challenges include operations in some markets with challenging demographics including weaker payor mix, low population growth, or modest market share within those service areas.


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.

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Muni Credit News January 3, 2017

Joseph Krist

Municipal Credit Consultant

Happy New Year to our readers! We begin the year with a view of what we think are the issues which investors should give primary attention to on their municipal credit radar screens.











Chicago, IL, San Jose, CA, Miami, FL, Baltimore, MD, Portland, OR. These five cities have the highest annual pension expenditure requirements as a percentage of revenues. Chicago’s is over 30%. Chicago, IL, Detroit, MI, Houston, TX, Portland, OR, Dallas, TX. These five cities pay the lowest proportion of required pension costs as a percentage of total  revenues. It is not an accident that Chicago (MCN 12/1/16) is the “leader” in both categories. It is merely a data based affirmation of what most investors already believe. It is why we believe that any upgrades of ratings or outlooks for the city are or will be premature.

Dallas (MCN 10/11/16) and Houston(9/29/16) will continue to be in the news for their pension problems. Benefit levels are a problem as are investment management deficiencies in both jurisdictions. What makes these situations interesting is that both cities ultimately have sufficient resources to finance these and capital needs. What is limited is their ability to access those resources without relaxing taxing limits established under the State Constitution. As is the case in other jurisdictions, they serve as an example of the reliance on state legislative action in order for localities to effect necessary financial changes.

And investors will have to increase scrutiny of the pension funding levels of other sorts of entities. The pension problems of Chicago’s water and sewer utilities have been well documented. Information released in the fall of 2016 shows that Boston’s transit system,  the MBTA, faces increasing investment difficulties as the result of poor overall performance and some very poor individual investment choices. All of these situations will pressure revenues at a time of increased resistance to fare box increases. No entity is immune to these issues.


Allegheny County, PA as we have previously discussed was the victim of a hack for ransom that resulted in a $1400 payment.

Los Angeles County acknowledged that confidential health data or personal information of more than 750,000 people may have been accessed in a cyber attack on Los Angeles County employees in May that led to charges this week against a Nigerian national. The May 13 attack targeted 1,000 county employees from several departments with a phishing email. The message tricked 108 employees into providing usernames and passwords to their accounts, some of which contained confidential patient or client information, officials said.

Most of the 756,000 people whose information may have been accessed had contact with the Department of Health Services, according to the county. A smaller amount of confidential information from more than a dozen other county departments also was compromised. Among the data potentially accessed were names, addresses, dates of birth, Social Security numbers, financial information and medical records — including diagnoses and treatment history — of clients, patients or others who received services from county departments.

Recent press reports have documented a raft of problems with software used since August 2016 by the Alameda County criminal justice system. The resulting ” glitches” have resulted in a number of false arrests stemming from poor case status management, erroneous documentation, and other issues which potentially could lead to civil liability on behalf of impacted defendants. Depending on the scale of the problem, there could be significant liability for the County.

Each of these situations highlight an ongoing and increasing potential liability facing municipal credits stemming from technology. Tech is not an area which has traditionally received a high priority as a spending item for municipalities, especially smaller ones. We think that this is one area which needs additional attention going forward.


We believe that healthcare will be the greatest source of uncertainty in 2017. The Trump administration has signaled significant changes in Medicaid through its appointment of a conservative ideologue in the field to head the CMS, The Centers for Medicare & Medicaid Services. CMS administers Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the Health Insurance Marketplace. She has worked with Vice President Pence in Indiana to impose payment requirements for recipients and stringent regulations which tend to reduce enrollment. Similar programs in other states have been abandoned due to what has been viewed as a poor cost/benefit result but it is likely that she will support this general policy direction.

This will occur with the uncertainty associated with the likely repeal of the Affordable Care Act as backdrop. There has been so much speculation about the timing and form of replacement, if any, that we would only be pretending to know what will result. Imagine how the CEO and CFO of any size hospital must be thinking. We can say that stand alone, small rural, and big city (Temple 10/25/16) Medicaid providers face the greatest uncertainty. “We were finally in a situation where for most of our patients there was a coverage option,” said Temple’s director of patient financial services, already speaking about the health law in the past tense. “Now there’s just a total unknown about what will be left.”

Diversely funded, geographically diverse providers would still be the credits to own as the process plays out. Cash on the balance sheet will continue to be the best cushion against such an uncertain outlook.


The U.S. Department of Energy has projected energy prices for 2017. While prices are projected to be higher across the board, they are nowhere near the levels of the halcyon days of just three years ago. This would bode poorly for the energy dependent states which have continued to experience lower production related revenues as well as lower general revenues as a result of decreased overall economic activities.

2014 2015 2016 2017
WTI Crude Oil
dollars per barrel
93.17 48.67 43.07 50.66
Brent Crude Oil
dollars per barrel
98.89 52.32 43.46 51.66
dollars per gallon
3.36 2.43 2.14 2.30
dollars per gallon
3.83 2.71 2.31 2.70
Heating Oil
dollars per gallon
3.71 2.65 2.12 2.62
Natural Gas
dollars per thousand cubic feet
10.94 10.36 10.24 11.02
cents per kilowatt-hour
12.52 12.65 12.53 12.87

North Dakota is a state were growth rates were in excess of 2% for four consecutive years. The 2014 prices of oil coincide with North Dakota registering the highest growth rate in the country in  2014-15.  In 2015-16 however, North Dakota’s growth fell to 0.15 percent, ranking 37th among states.


We believe that infrastructure will obviously be a major topic in 2017 but, we are concerned that there will remain a huge disconnect between Washington and the local level as to what their priorities should be under any infrastructure “program”. Recently, Politico conducted a discussion among a number of Rust Belt politicians and policymakers regarding what their concerns were as to what the most important infrastructure projects should be. We found their comments interesting in that they reflected projects on which economic growth could be supported and developed versus projects which might generate profits for their providers. Their unattributed comments as presented by Politico are in italics.

One good example cited was the challenge of updating 19th Century sewers that handle both waste and storm water. A mandate from the EPA to upgrade sewers without accompanying federal funds is creating a major challenge for cities and property owners who cannot afford the costs of replacement. The costs are holding back economic development. Participants suggested that sewer repairs should be combined with street projects as part of a national infrastructure push.

“Sewers are a major issue for all Midwestern cities and the EPA is killing us with costs and regulations. If I were running the federal government, my number one thing I’d do by far is pay all these unfunded sewer mandates, which are by far the largest capital expense in many of these cities.” “It’s a huge deterrent to businesses and residents—sewers. And it’s being funded by low income, regressive taxes.” “The EPA’s speed at which they expect us to fix it, to bring it up to clean air and clean water standards, is terrible, because it requires these massive local tax increases—rate increases for sewers that compound the cost of living.”

Local officials complained about by free-riding suburban residents who pay no taxes in the cities they commute to every day. Free riders have long been an issue in the provision of public goods.

There was disagreement among participants over the value of investing in large rail projects which can be costly to build and maintain, but there was broad support for expanded bus systems. “Cities depend on a robust public transit system. And in the Midwest, I think that’s primarily bus transit, and I think that needs to be dramatically expanded.” “I think these speculative rail transit investments are really not going to deliver the results … I think the back bone of these highly dispersed, sprawling Midwest cities has to be bus—plain old bus service in select areas.” “Is there an argument to be made to give us the money for the regional transportation system that is going to preserve the rural communities, and enhance the industrial manufacturing capacity, jobs creating capacity, of this city, so that people do not have to move away?”

Several participants suggested that transportation infrastructure should combine public transit, bike lanes, and access to ride sharing services such as Uber and Lyft. Many policy makers are concerned that for-profit transit providers will be a substitute for cost of service mass transit. There are potential issues of income based tiers of levels of service if Uber and Lyft is used to replace mass transit, specifically buses, as we know them. Leaders of smaller cities seem to lean in that direction. “So it’s a mix of fixing up 50 and 60-year-old transit systems like they have in Chicago, like we have here [in Washington, DC]. Fixing up roads and bridges, but adding to those alternative forms of transportation. Bus rapid transit means you buy new buses.

Mayors expressed enthusiasm for the creation of a national infrastructure bank. “An infrastructure bank where cities can borrow money—patient money, to invest—to deal with industrial sites, old and abandoned industrial sites.” “Don’t put a lot of requirements in it; just make it straight. And part of the dilemma is the federal government, in the best of times, is difficult to deal with.” There was also support for increased funding for the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Transportation Investment Generating Economic Recovery Act (TIGER). TIFIA is the lone program that allows cities to come innovative, creative, take some private dollars, take some state dollars—boom. Build a new bridge, fix a bridge, fix a transit system, build a walking and biking path.”

One of our concerns is the willingness of Congress, especially the House, to fund  infrastructure spending. “The Trump people are talking a good game about infrastructure, but Obama proposed an infrastructure bank at $50 billion and the Republican Congress said no. Now, we still have a Republican Congress; we have a Republican president, so maybe now that it’s Trump’s idea, and it’s not Obama’s idea, they’ll like it.” “Whatever we do in America, we need a big pot of money.” Participants predicted that despite interest at the local level for a creative approach to infrastructure, a federal infrastructure effort would remain focused on building highways—and that’s not necessarily a good thing. “I think if there’s an infrastructure bill, 80 percent or 90 percent of it will go to highways, because that’s the powerful lobbies, and it will be 10 percent of it going to transit.”


No matter what sort of project is undertaken, the term P3 will likely be attached to it. What that means for individual projects will be different in every case. Will it be a privately financed and operated new or expanded road facility (new toll HOV lanes) ? Will it be the use of design/build contracting programs to produce traditional public facilities on a turnkey basis (the Goethals Bridge Replacement Project for the Port Authority of NY/NJ or the Tappan Zee bridge replacement)? Will it be some mix of design/build/operate for profit (LaGuardia Airport replacement)?

Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernizing the air traffic control system — do not generate a commercial return and so are excluded from his plan.  Nor can the non-taxable pension funds, endowments, and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program. In many cases, the kind of improvements that people would choose would realistically turn currently free facilities into revenue generators – tolling many of the currently free interstate highways for example. I’m not sure that is what folks in the hinterlands were voting for.

Each has its own policy and credit implications and there is no correct answer for each undertaking. All of them have strengths and weaknesses in terms of which is most likely to generate the most positive result for investors. Investors will have to weigh all of the issues when evaluating P3 projects as they are developed.


The toxic mixture of pensions, taxes, and politics will be played out most prominently in these three states. Each of them have massive pension underfunding problems. Each of them has a highly tax averse voting base. Each of them has a highly unpopular governor. These form a tripod of likely inaction in each of these jurisdictions, at least over the next year.

In New Jersey, Gov. Chris Christie is term limited and his popularity ratings are one point above the historic low recorded for any New Jersey Governor in modern times. Lacking little if any political capital, the Governor is unlikely to be able to use his usual package of tactics in order to maneuver the legislature into any serious changes to pensions. We think that investors should be pleased if the State actually makes its four required payments as established under legislation recently signed by the Governor. We see no potential for credit improvement for the State in 2017.

In Illinois, Gov. Bruce Rauner’s first term may only be half over but he has already announced his intention to run for reelection and to heavily finance his own campaign. In response, we would expect a continuation of the political mud wrestling which has characterized the last two years. Investors will get a sense of which way things will go as the budget agreement reached for FY 2017 only covered its first half. The governor and legislature will need to reach a new agreement for the remainder of the FY immediately after the beginning of the New Year. We see a reversal of negative credit trends to be in the realm of the miraculous.

In Connecticut, Gov. Dannel Malloy faces a tax resistant electorate as well. Here the problem with pensions is at both the State and local level. While dealing with its own pension problem, localities will increasingly look to the State for additional aid. Coming  up with the funding for either is highly problematic. It may not be for two years but, if he runs for reelection, Malloy would be seeking a third term. His poll numbers are low, among the five worst in the country. That embattled status will make meaningful reform difficult and will continue to weigh negatively on the State’s ratings.

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