Monthly Archives: May 2017

Muni Credit News May 30, 2017

Joseph Krist

Senior Municipal Credit Consultant


Louisiana Local Government Environmental Facilities and Community Development Authority

$231,045,000 Refunding Revenue Bonds and $19,840,000 Taxable Hospital Refunding Revenue Bonds

Moody’s: A2 (Stable) Standard & Poor’s: A (Stable)

The bonds are being issued with the benefit of a recent upgrade of its rating on the credit to A2 from A3. Moody’s credits the system’s strong statewide presence as a leading provider of women’s and infant services and strong brand equity, resulting in a high market capture of newborn deliveries in the Baton Rouge service area. It also cites the system’s multiyear improvement in liquidity and leverage metrics, conservative asset allocation, and a debt structure which includes the absence of a defined benefit pension plan and debt derivatives, maintenance of strong operating performance, and savings related to this refunding.

Woman’s Hospital Foundation is an 168 adult licensed bed, 122 bassinet, and 84 bed NICU facility that specializes in obstetric, gynecological, breast, newborn and neonatal services for women and infants in Baton Rouge and the surrounding areas. WHF is the only independent, non-profit women’s hospital in the country with the 17th largest obstetric service in the nation. The system operates one of nine level three regional neonatal intensive care units within the state of Louisiana. The bonds are secured, subject to certain limitations, by a grant of security interest in the receipts of the Woman’s Hospital Foundation. With the revision of the Master Trust Indenture the system is expecting to remove the security provision of a mortgage lien on certain properties of the WHF which includes the hospital and land upon which it is situated. The revision of the MTI will also remove the debt service reserve fund.


$165,500,000 C-470 Express Lanes Senior Revenue Bonds

Fitch: “BBB”

Construction phase for the express toll lanes (ETLs) is relatively straight-forward with a 38-month construction timeframe. Permit risk is low with construction occurring within the existing operating highway footprint. The project is the development of a variable toll rate express lane on the southern portion of the 470 highway project which surrounds Denver. It is designed as a congestion reliever and does not have competition from HOV lanes on the main road. The Enterprise is authorized the set and collect tolls which will be determined by congestion levels on the adjacent lanes.

The project represents the expansion to a growing concept of variable time of day congestion based lanes being established on existing major highways. These facilities exist within established free and toll based facilities. Like the others, this project will be built using a P3 model for design, construction, and operation. It employs a fixed-price, date-certain contract with an experienced contractor group backed by robust parent guarantees sufficient liquidity and schedule flexibility.



The U.S. Trustee filed a motion last week supporting the appointment of an Official Retiree Committee to represent the interests of pensioners in the bankruptcy petitions filed on behalf of the commonwealth and the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), but objected a request by the Ad Hoc Retiree Committee to have the court appoint the group as its members.

The Trustee was answering a motion filed by a group called the Ad Hoc Retiree Committee, which comprises 17 organizations and individual retirees who on May 5 asked federal Judge Laura Taylor Swain to appoint an official committee representing retirees and them as its members. With a $46 billion liability, the commonwealth’s employee retirement system is expected to suffer cuts. There are more than 200,000 government retirees.

Assistant U.S. Trustee Monsita Lecaroz Arribas said the Trustee agrees that retirees should have an official committee and, therefore, does not oppose the appointment of a retiree committee. “This case clearly needs a retiree committee and sooner rather than later. Given this situation and the comments of the Court and the various constituencies at the first day hearing, the United States Trustee intends to solicit for and to appoint a retiree committee. The United States Trustee expects to complete the committee solicitation process no later than June 16 and will hold one or more formation meetings as soon as possible after the solicitation is complete,” she said.

The Trustee, however, objected the motion to the extent it asked the court to appoint or direct the appointment of the alleged Ad Hoc Retiree Committee as an Official Retiree Committee because courts do not have that authority, she said. Under the U.S. Bankruptcy Code, she said, appointing members of an official committee is a responsibility entrusted exclusively to the Trustee. “The Bankruptcy Code does not authorize a Court to direct the United States Trustee to appoint a pre-petition committee as the official committee or to appoint specific members to an official committee.

“Accordingly, that portion of the Motion must be denied. In filing this response, the United States Trustee does not suggest that members of the Ad Hoc Retiree Committee could not serve on an Official Retiree Committee (or any other official committee). But the law on committee formation must be followed,” Lecaroz Arribas said. It added that if the U.S. Trustee were to appoint the Ad Hoc Retiree Committee as members of the official retiree committee, it could be prone to challenges that the committee was unfairly chosen or does not adequately represent the group.

Other highlights of the initial bankruptcy hearing include that the  judge approved most of the motions for case management, but with amendments requested by the creditors. Despite the complaints of Cofina bondholders, she agreed to consolidate all claims under the lead claim of the commonwealth for administrative purposes only, allowing claims to continue to be filed on other dockets. Attorney Martin Bienenstock anticipates that the fiscal oversight board is preparing to file Title III for the Highways and Transportation Authority (HTA), and officials said other entities will follow.

Judge Taylor Swain did not rule on a motion by Bank of New York Mellon, Cofina’s trustee, on how to proceed with the payment of $16.3 million to be paid June 1 despite the lawyer’s insistence. The judge also did not rule on a request for an order to compel suppliers of utilities to continue to provide service. Lawyers representing Cofina raised the issue that their interests are not protected because the fiscal board as well as the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) are also representing the interests of general obligation bondholders. The GOs are disputing the legality of Cofina and want sales and use tax revenue to be used to pay them.

This week, a letter written on behalf of Fafaa on May 16 states that funds held at the Bank of New York Mellon (BNYM), the trustee of sales-tax revenue bonds issued by Cofina, are the property of Cofina. The assertion appears to support the corporation’s legality. Senior beneficial bondholders and an insurer of certain senior Cofina bonds claim that because the Fiscal Plan Compliance Law will allow the commonwealth to take Cofina revenues to pay for various government services, a default should be declared. A group of subordinate beneficial holders of Cofina bonds argues that there is no default and they should be paid as usual. Cofina, on the other hand, contends that no default has occurred and that if any pledged sales-tax revenues were to be diverted, it would still have 30 days to “cure” any default.


Catholic Health Initiatives, the nation’s third-largest nonprofit health system has seen its ratings under continuing pressure as it struggles with a high debt load. It has had a difficult time bringing a number of acquisitions together as it undertook a plan of consolidation in order to achieve scale as it deals with a shifting healthcare environment. While we have endorsed consolidation across states as a strategy for withstanding the current uncertainty in the healthcare space, the strategy is not without risks.

Englewood, Colorado-based CHI operates in 17 states and comprises 104 hospitals, including four academic health centers and major teaching hospitals as well as 30 critical-access facilities; community health-services organizations; accredited nursing colleges; home-health agencies; living communities; and other facilities and services that span the inpatient and outpatient continuum of care. In fiscal year 2016, CHI provided more than $1.1 billion in financial assistance and community benefit – a 13% increase over the previous year — for programs and services for the poor, free clinics, education and research. Financial assistance and community benefit totaled more than $2 billion with the inclusion of the unpaid costs of Medicare. The health system, which generated operating revenues of $15.9 billion in fiscal year 2016, has total assets of approximately $22.7 billion.

Some of the operating problems which can exist in the currently turbulent healthcare space have become evident for CHI in Kentucky. KentuckyOne Health, the largest and most comprehensive health system in the Commonwealth is a part of CHI. KentuckyOne Health was formed when two major Kentucky health care organizations-Jewish Hospital & St. Mary’s HealthCare and Saint Joseph Health System were merged. In late 2012, the organization formed a partnership with the University of Louisville Hospital | James Graham Brown Cancer Center. It has more than 200 locations including hospitals, physician groups, clinics, primary care centers, specialty institutes and home health agencies in Kentucky and southern Indiana.

In December, the University of Louisville Hospital agreed with KentuckyOne to end KentuckyOne’s management of the academic medical center. The university hospital will begin managing itself in July after the university accused KentuckyOne of failing to make about $17 million in promised program improvements and falling $29 million behind in making capital improvements to the facilities.

Now, as it continues talks with Catholic healthcare system – Dignity Health –  about a combination, KentuckyOne has announced that it wants to sell its hospitals in the competitive Louisville market and focus on its healthier markets in Lexington and eastern Kentucky. This would involve the sale of Jewish Hospital, Frazier Rehab Institute, Sts. Mary & Elizabeth Hospital, Medical Centers Jewish East, South, Southwest and Northeast, Jewish Hospital Shelbyville, Saint Joseph Martin and KentuckyOne Health Medical Group provider practices in Louisville and Martin.

Catholic Health Initiatives reported an operating loss of $483 million from its fiscal 2016. The operating loss in fiscal 2016, which ended June 30, compared with an operating surplus of $24 million in fiscal 2015. In its fiscal second-quarter financial report ended Dec. 31, CHI disclosed that in Kentucky its operating earnings before interest, depreciation and amortization had fallen to $17.1 million in the quarter compared with $30.5 million in the year-earlier quarter. CHI cited unfavorable shifts in payer mix plus labor costs that had risen as a percentage of net patient services revenue to 49.4% compared to 44.8% in the same period of the prior fiscal year. That represented $26.2 million more in labor costs for the quarter vs. the year-earlier.

Currently, CHI’s debt is rated Baa1 and BBB+ after its most recent downgrades this Spring.


Santa Barbara, Calif.-based Cottage Health and Sansum Clinic, also in Santa Barbara announced a proposed merger in June 2013. It would have combined Cottage Health’s three hospitals and various enterprises with roughly 24 Sansum-owned outpatient clinics across Santa Barbara County. Cottage Health reportedly agreed to divest its interest in its outpatient centers and would become a primarily inpatient entity. Nonetheless,  the Federal Trade Commission rejected the organizations’ merger proposal on grounds that the merger would prove anticompetitive.

In January of this year, Cottage saw Fitch downgrade its ratings on its outstanding debt from AA- to A+. Total long-term debt at Nov. 30, 2016 was $417 million. Fitch cited  weakened operating performance in 2015 and 2016 combined with an increase in debt issued in 2016. Operating margin is projected to be negative 0.2% for 2016 compared to a budget of 2.9% reflecting increased benefits expense, an erosion in payor mix, higher than budgeted electronic medical record (Epic) implementation expenses, and lower than expected provider-fee funding.

The reduced operating margins are projected despite Cottage’s strong market share in its service area at around 90% and its position as the only provider of inpatient services on the south coast of Santa Barbara County.  The proposed merger reflects the pressure even dominant service providers in wealthy service areas feel when the reimbursement environment is uncertain and under pressure.


The nation’s state insurance commissioners urged the Trump administration last week to ensure continued funding for payments to health insurers to cover cost-sharing reductions for low-income exchange plan members.

The National Association of Insurance Commissioners, most of whose members come from Republican-led states, told Office of Management and Budget director Mick Mulvaney in a letter that continuing the cost-sharing reduction payments “is critical to the viability and stability of the individual health insurance markets in a significant number of states across the country.” It goes on to say “there is increasing concern that more carriers will pull out of this market and rates will continue to rise, leaving consumers with fewer and more expensive options, if they have any options at all. This is not a theoretical argument – carriers have already left the individual market in several states, and too many counties have only one carrier remaining. The one concern carriers consistently raise as they consider whether to participate and how much to charge in 2018 is the uncertainty surrounding the federal cost-sharing reduction payments.”

The NAIC also wrote to Senate leaders urging them to take swift action to stabilize the individual insurance markets, including funding the CSR payments and providing sufficient money for reinsurance programs or high-risk pools. Specifically, it urges the Senate to: 1) ensure the cost-sharing reduction (CSR) payments are fully funded in 2017 and 2018; and, 2) provide sufficient and sustained market stabilization funding to states for the establishment of reinsurance programs or high risk pool programs. These two actions alone would go a long way toward stabilizing the individual markets in our states while legislative replacement and reform options are debated.

The commissioners warned Mulvaney, a fierce opponent of the Affordable Care Act and critic of the law’s CSR payments, that more insurers will exit the markets in 2018 and premiums will spike if carriers don’t receive assurance soon that they will receive the approximately $7 billion in federal payments.

Immediate action is needed, they said, because carriers are making decisions now whether to offer plans on the exchanges in 2018 and where to set premiums.

Citing uncertainty over the CSR payments as one big factor, insurers say they’ll have to charge much higher rates for next year. Plans in Connecticut have requested increases ranging from 15% to 34%. Maryland rate hikes range from 18% to nearly 60%. Most of Virginia’s insurers have requested double-digit jumps and it is expected that the same will occur  in the New York State market.

House Republicans successfully sued to block the ACA-required CSR payments on the grounds that the Obama administration funded them without the money being appropriated by Congress, whose Republican majority refused to approve it. The Obama administration appealed the district court’s ruling, but the Trump administration hasn’t declared whether it will continue the appeal. In the meantime, a federal appeals court granted the Trump administration a 90-day delay on its decision to appeal a case brought by House Republicans against ObamaCare subsidies paid to insurers.
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 May 25, 2017

Joseph Krist


The Dallas Police and Fire Pension System has signed off on a proposed bill to help fix the City’s ailing pension system. The agreement includes a reduction to benefits, and the creation of a new retirement plan. Additionally, it calls for contribution increases from participants, and decreases to Dallas’ contribution rates. It also restricts the city’s minimum payment for the first five years, while another minimum payment will take effect for the two years after. Beyond that, the city will have a contribution rate based on 34.5% of payroll, minus overtime.

Before the celebration can begin is must be noted that the current proposed bill incorporating these changes, still requires votes from the full Texas Senate and House. It  requires a $13 million lump sum payment from the city for each of the first five years. The contribution rates during the sixth and seventh years will be determined based on the Dallas’ hiring plan. And before July 1, 2024, the city must use a third-party actuary to determine the fund’s progress, which could lead to changes to the minimum contribution rates by the city and system members as well as the lump sum amounts.

As with any true compromise, both sides gave something. Pension participants will end up paying more while receiving less in benefits. Taxpayers will also pay more, but how much more is not yet known. And the state Senate granted the city six of the 11 members on a new Police and Fire Pension Board, and any major benefit changes proposed by the senate must now be agreed on by two-thirds of the pension trustees.

If enacted by the Legislature, pressure on the city’s ratings will be relieved and the talk of bankruptcy which swirled during the heat of the debate should disappear.


The Trump budget gave some hints about his infrastructure plans. One of the main features is an unsurprising proposal to lift restrictions on the ability of states to collect tolls on sections of the interstate highway system. For many of you in the Northeast and Midwest, the concept of tolls on interstates is already a reality. The fact is that many of those roads where tolls are a reality were built by states before their incorporation into the interstate system.

In those areas and states where interstates have been free, the politics are much more fraught. The most recent example was in Pennsylvania where an attempt was made to impose tolls on I-80. The road was surveyed and sites were selected for the installation of toll collection equipment.  A combination of organized lobbying by commercial transportation interests, especially the trucking industry which is a heavy user of the road, and individual voters who use I-80 as a regular route for relatively frequent short distance trips convinced the Legislature that tolling was a political non-starter.

As a result, tolls were not imposed and the subject has not come up for serious consideration again. We do see where the use of dedicated lanes designed to relieve congestion and reduce commute times have been growing as a compromise alternative. These dedicated lanes, characterized by demand-based dynamic pricing have been seen as a more politically attractive model. They also fit the mold of P3 projects with many of them being designed, built, and operated by private owner/operators who use the toll revenue collected to finance construction and maintenance.

Like many other aspects of the Trump budget, the tolling plan seems designed to stimulate debate rather than to result in actual widespread tolling of currently free roads. The same combination of commercial and locally oriented interests can be expected to marshal opposition to any such plan and we would be surprised to see it actually come to fruition.


Gov. Dannel P. Malloy and union leaders are reported to have agreed on a framework for concessions that would save the state more than $1.5 billion over the next two years and help close the state’s budget deficit The five-year deal calls for a “hard” wage freeze in the first two years and a one-time $2,000 bonus for some employees in the third year. The employees would receive raises of 3.5 percent in the fourth and fifth years. Increases in employee contributions for pensions and health benefits are said to be part of the framework.

The unions are expected to vote on the plan by June 23 providing enough time for inclusion into a budget to be enacted by June 30 for FY 2018. The agreement would save about $710 million in the first year, but other savings would be necessary to close a projected deficit of more than $2 billion for the fiscal year that starts on July 1.

Among the changes is an increase in the cost of hospital emergency room visits and the creation of a new pension level, known as Tier 4, which will be a hybrid plan for new employees that is similar to a 401(k) plan.


With a week to go before the May 31 adjournment, Senate Democrats went ahead and  voted 32-26 to pass tax legislation, which would bring in roughly $5.4 billion in new revenue. This despite the fact that there is no prospect that the Governor would sign such a bill. The personal income tax rate would increase from 3.75 percent to 4.95 percent, just below the 5 percent rate in place before Gov. Rauner took office. The corporate income tax rate would be hiked from 5.25 percent to 7 percent. The higher rates would be retroactive to Jan. 1, meaning if they became law the effect on take-home pay would be far larger.

The state’s share of the 6.25 percent sales tax would be extended to a handful of services not currently covered, such as tattoos and piercings. The bill also calls for a new 5 percent tax on satellite television and an extra 1 percent entertainment tax on streaming services such as Netflix. The proposal would close various corporate loopholes and expand tax credits for low-income families.

The increases are part of a budget proposal designed to backfill budgets for universities and social services that have gone without funding since January. The plan does not include a way to pay down the state’s $14 billion backlog of bills, though it would create a $200 million rainy day fund that could be used for that purpose. Nonetheless, most state agencies would see a 5 percent cut in spending, while universities would face a 10 percent cut.

Without an agreement by the adjournment date, Illinois faces the real prospect of becoming the nation’s first state to be rated below investment grade. We would not be surprised if that happens. The bar to approve legislation with an immediate effective date rises to three-fifths after May 31.


Atlantic City is in the process of coming to market with $73,065,000 of insured, state enhanced General Obligation bonds. Proceeds will finance payments under the settlement of property tax refunds to the Borgota casino. The financing is part of the overall plan being undertaken under state oversight to stabilize the City’s very weak finances. The Moody’s rating for the issue of a Baa1 enhanced rating reflects the enhancement provided by the MQBA state aid intercept program and is notched once off the State of New Jersey’s (A3 stable) rating.

The city’s underlying ratings remain a very weak Caa3 reflecting the continued, albeit reduced, likelihood of default within the next year and the ongoing possibility of significant bondholder impairment despite the passage of rescue legislation. The rating also incorporates the recent takeover by the state. The city’s rating outlook was revised  to positive to reflect the material progress made by city in collaboration with the state, most notably the Borgata settlement and the balanced introduced 2017 budget.

While an important step in the City’s recovery, the credit remains significantly distressed. While Moody’s maintains a stable outlook for the State, we are much less sanguine about its prospects in light of the very difficult political backdrop to the State’s finances and the likelihood of little concrete action until 2018 after the fall gubernatorial election.

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 May 23, 2017

Joseph Krist

Senior Municipal Credit Consultant




Taxable Bonds

Moody’s: “A3” (Stable outlook)  S&P: “A-” (Stable outlook)  Fitch: “A-” (Stable outlook)

The wave of taxable hospital debt continues. Bond proceeds will be used for general corporate purposes including the repayment of bank lines and refinancing of certain outstanding debt obligations. NYUHC is the sole Member of the Obligated Group under the Master Indenture. Bonds are jointly secured by a pledge of gross receipts and a mortgage of certain health care facilities of NYUHC. NYU Winthrop is not a member of the Obligated Group. NYUHC is a tertiary care teaching hospital with campuses located in midtown Manhattan and Brooklyn. NYUHC owns three inpatient acute care facilities in Manhattan and Brooklyn: (1) Tisch Hospital, located in Manhattan on the campus shared with NYU School of Medicine; (2) NYU Hospital for Joint Diseases Orthopaedic Institute, an orthopaedic, neurologic and rheumatologic specialty hospital located in Manhattan, which also houses the Rusk Institute of Rehabilitation Medicine; and (3) NYU Lutheran, located in Brooklyn. NYUHC also operates over thirty ambulatory facilities in Manhattan, Brooklyn, Queens and Long Island.

NYUHC has a strong and increasingly visible brand supported by academic alignment with NYU. It has established solid operating momentum especially in light of its need to significantly recover from the physical impacts of Superstorm Sandy in 2012. It has shown clear strategic planning, careful fiscal oversight that has translated into successful execution of strategy, and healthy demand garnered by a growing clinical footprint. NYUHC does have a high debt burden, still modest balance sheet resources, still significant capital plans, execution risk of several growth strategies simultaneously, in what is a very highly competitive market.





While the budget debate plays out in Washington and there are serious indications of a desire on the part of the Trump Administration to reduce aid to transportation, states like Oregon continue to move forward with capital development of transportation assets. The Oregon Department of Transportation administers and oversees the state’s highway, public transit, rail, and traffic safety programs, and implements motor vehicle and motor carrier laws throughout the state. These functions include planning, engineering, construction, maintenance, operation, regulation and enforcement. The department collects various taxes, fees and grants to fund these functions.

Proceeds from the $250 million Series 2017A bonds will finance certain transportation projects authorized in the state’s Jobs and Transportation Act (JTA). Other proceeds of the Series 2017B bonds will refund outstanding bonds for net present value savings with no extension of maturity. Combined pledged revenues, net of certain expense deductions and statutory transfers, provide security for the bonds. Deductions include various administrative expenses and costs of collection. In addition, the state is statutorily required to make certain apportionments to cities and counties to fund highway improvements prior to paying debt service.

Ratings reflect the constitutional dedication of stable pledged revenues that provide solid debt service coverage and legal provisions are highlighted by a three times senior lien additional bonds test. The rating also incorporates the net nature of the pledged revenues, wherein certain operating expenses and revenue sharing with local governments are paid prior to debt service.



Retirement Facility Revenue Bonds

(Buckner Senior Living – Ventana Project)

Buckner Senior Living, was incorporated to develop a new CCRC. BSL has already acquired land to construct the new CCRC in north Dallas, to be known as Ventana. Current plans include 189 ILUs, 38 ALUs, 26 memory support units, 72 skilled nursing beds, and various shared spaces and amenities. Total cost of the project is estimated at $200 million, to be funded with bond proceeds in 2017 (outside the OG). Management anticipates a limited level of liquidity support and equity contribution from Buckner Foundation (BF) for this project. Proceeds will fund the cost of construction and capitalization of a portion of interest.

The structure of the financing is typical for that of a standalone CCRC credit. The credit features the typical sources of risk – construction, marketing, and timely fill up of the units. The success of the project depends on the successful execution by management in each of the primary risk areas. This requires the use of realistic and achievable assumptions as to demand for units, pricing, and the level of penetration of the local real estate market required to achieve marketing goals. In turn, these depend on the ability of the local housing market to support demand and timely and adequate funding of entrance fees.

Typical difficulties in the achievement of success for these type of project structures in the sector are delays in construction and/or unanticipated cost increases, shortfalls and resulting delays in occupancy which negatively impact available cash flows to support debt repayment. Shortfalls can reflect lower demand than expected or an unfavorable mix in demand versus the mix of units available.



In spite of the fact that he is expected to have a major role in any negotiation between the Legislature and the Governor, House Speaker Mike Turzai recently wrote Republican voters that he plans a gubernatorial run. In that May 10 letter, Turzai claimed he “sidelined” Governor Wolf’s agenda by “leading the charge” against the governor’s 2015-16 plan, and against a later bipartisan compromise that would have ended the stalemate months earlier.

If he runs, Turzai would be the first legislative leader to challenge an incumbent executive since the state constitution was changed in 1968 to allow a governor to seek two consecutive terms. Even if Turzai doesn’t go through with it, his letter signaled an adversarial relationship. Now the speaker and the Governor will be at the center of a potentially awkward and fraught negotiation that will attempt to reconcile two very different approaches to the budget.

In February, Wolf presented a $32.3 billion spending plan that would downsize state government, raise the hourly minimum wage and enact targeted business tax increases. In April, the House passed a $31.5 billion plan. It had no new taxes and no minimum wage bump. It estimated new revenue from Turzai’s long-running plan to privatize the state-owned wholesale and retail wine and liquor systems.

Since then, the state’s financial outlook has worsened. The Senate, which now has the House budget, opposes Turzai’s liquor bill in part because it actually would cost the state money, worsening the deficit. On top of that, the state police need money. Last year, the Legislature passed a bill calling on the administration to reduce the amount of gasoline and diesel fuel tax money that flows to the state police from PennDOT’s road and bridge repair fund. The reductions start July 1. To fill the first-year hole, Wolf has proposed a $25 per capita fee for municipalities that rely on full-time trooper coverage.

Without the fee or other new revenue, state police leadership estimates that 800 troopers could be laid off and cadet classes could be canceled. Trends are not good as Pennsylvania experienced an 8.9% shortfall in expected revenues for the key month of April.

The concern is that these political considerations could seriously complicate the budget process as they did in prior fiscal years. Those delays resulted in damage to not only the Commonwealth’s ratings but those of underlying municipalities. Many entities, both municipalities as well as non-profit service providers were forced to either curtail services or finance operations through costly and previously unnecessary short-term borrowing.

Yet another delayed budget would further highlight the Commonwealth’s difficult financial plight and highlight its continuing need to deal with its pension funding difficulties. The commonwealth is likely to struggle to balance its budget annually as its pension contributions ramp up and expenditures grow more quickly than revenues.


The Civic Committee of the Commercial Club of Chicago on Thursday released a detailed report that has a slew of budget ideas. The big picture suggestion from the private, not-for-profit group of senior executives is that the state must identify $10 billion in expenditure reductions and revenue increases for each year from 2018 until 2022 in order to return the state to fiscal sustainability. It notes revenue increases of “at least” $8 billion will be necessary to get the state back on its feet.

The report doesn’t include specific spending or revenue proposals — that responsibility, the report says, lies with legislative leaders and Gov. Bruce Rauner. The report notes problems with the state’s reliance on property taxes but, there is no suggestion to freeze them. A property tax freeze tied to an income tax hike remains at the heart of negotiations among senators and the governor’s office with just 13 days before the end of the legislative session.

The civic group estimates that raising the personal income tax to 5 percent from 3.75 percent would bring in $4.1 billion in revenue for fiscal year 2018; taxing all federally taxable retirement income would bring in $2.5 billion; eliminating exemptions, property tax credits and education expense credits from those who make more than $50,000 a year would bring in $1.3 billion; and expanding the sales tax to include consumer services based on Iowa as a model would bring in $1.2 billion. Coupled with increasing the corporate income tax to 9.5 percent and other measures, the revenue package could bring in $9.7 billion, the group says.


As we go to press, Puerto Rico faces a deadline to present its fiscal 2018 budget to the fiscal control board for review. “Yes, it will definitely be ready [by then],” said the governor when asked by whether the administration will meet the Tuesday deadline to deliver its version of the next fiscal year’s budget. It is still unclear if the document will be made public that day. On May 8 the fiscal board granted the Puerto Rican government an additional 14 days to improve the draft budget delivered on April 30 before the entity approves it or notifies violations. Since the delivery of its “draft” spending plan to the board, the administration has yet to disclose budget-related documents, calling them a confidential “working document.”

Puerto Rico’s fiscal control board commenced Monday bankruptcy proceedings under Promesa’s Title III for the Highways & Transportation Authority (HTA) and the central government’s Employees Retirement System (ERS). According to the court filings, the board says both entities meet Promesa’s requirements to initiate debt-restructuring processes under Title III, including good faith negotiations with creditors, efforts to make available updated financial information and a certified fiscal plan. For ERS, the governor pointed out the “precarious situation” of the public retirement system, its “eventual insolvency in the coming months” and not being able to reach agreements with its creditors as reasons to ask the oversight body to authorize the restructuring process provided by the third chapter of Promesa. Payments of retiree benefits will be made directly from the general fund on a “pay-as-you-go” basis,  once ERS liquidity is depleted–as early as next fiscal year, which begins in July. According to the commonwealth’s 10-year fiscal plan, the government estimates this will cost about $1.1 billion annually.

The Infrastructure Financing Authority (PRIFA) and the Convention Center District Authority still await a move to Title III. The opaque nature of the Government’s approach to all of these issues grows tiresome. We believe that despite statements to the contrary, that Title III filings were all but assured for HTA and the other public corporations. This reflects our belief that the ability to significantly haircut outstanding debt is the Government’s real strategy behind all of its dealings with its financial problems.


We know that the recent trends in state fiscal performance have been troubling to say the least. This is probably the weakest performance for state revenues versus where we are in the economic recovery cycle in some time. April’s performance was disappointing by any measure which is alarming because it is typically one of the largest collection months. Nine states reported underperformance versus projections with five showing double digit shortfalls.

This year’s results did differ from the historical pattern which makes future projection more difficult. In states’ revenue reports for the month the weakness is mostly not in taxes withheld from wages, but taxes on estimated payments. Estimated payments, which taxpayers make quarterly based on declared nonwage income such as capital gains, are generally 20%-30% of total income taxes. In several states, April income taxes actually declined from April 2016, despite the fact that 2016 was a much better year for the stock market than 2015.

The lack of legislative achievement by the Trump administration is likely playing a role. Like healthcare and infrastructure, a policy vacuum is forcing the states to face the brunt of inaction. The declines in estimated payments despite the strong year for stocks in 2016 suggests that at least part of this weakness may be attributable to taxpayers deferring recognition of investment income in anticipation of lower tax rates.


The Census Bureau’s 2015 Annual Survey of State Government Finances published last week indicates that federal aid made up nearly a third of all states’ general fund revenues in fiscal year 2015. The single largest line items in states’ budgets include federal funding for transportation, Medicaid and other social assistance programs. The findings show revenues, expenditures, debt, and cash and security holdings for each state, as well as a national summary of state government finances. The major source of these public finance statistics are the states’ own accounting systems or through intermediate reporting systems.

Louisiana and Mississippi are the top recipients in federal aid in 2015.  Federal intergovernmental revenues accounted for about 42 percent of their general fund revenues, the top shares nationally. Other states whose budgets are most dependent on the feds include Arizona (40 percent), Kentucky (40 percent), New Mexico (39 percent), Montana (39 percent) and Oregon (39 percent). The least-reliant state budgets, which include North Dakota (18 percent) and Virginia (22 percent).

The Census Bureau’s classification of public welfare funding includes Medicaid, Temporary Assistance for Needy Families (TANF), child welfare services and a range of other assistance programs mostly for low-income individuals. It excludes school nutrition programs and the Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

The federal share was highest — more than 90 percent — in New Mexico and Ohio. By comparison, federal revenues accounted for slightly less than half of public welfare spending in Colorado, Massachusetts, Rhode Island and Virginia.


After months of private squabbling and public threats of a legislative overtime session, the Texas House and Senate finally compromised to unveil a joint budget past weekend. Budget documents indicated around $1 billion would come from the state’s Rainy Day Fund, a $10 billion savings account available to shore up the budget in difficult years. That money would pay for priorities such as repairs to the state’s aging mental health hospitals and bulletproof vests for police officers.

Nearly $2 billion more would come from an accounting maneuver related to transportation funding approved in 2015. The proposed budget would delay a payment to the state highway fund in order to free up that funding for other needs in the current two-year budget. The House had previously been critical of the possibility. Medicaid, the federal-state health insurance program for the poor and disabled, were not fully funded. The Senate had pushed for the elimination of a budgeting tactic known as a special item, through which universities and colleges get dollars for specific projects allocated outside the standard funding formulas. The House opposed the elimination, saying it was too drastic of a move to take without further study.

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 May 11, 2017

Joseph Krist

Editor’s Note: The Muni Credit News will not publish net week as we attend the annual meeting of the National Federation of Municipal Analysts in Washington, DC. The MCN will be back on Tuesday May, 23.



$1,089,815,000 General Obligation Refunding Bonds

Moody’s: “Aa2”   Fitch: “AAA”

The nation’s second largest school district comes to market with strong ratings. The bonds are being issued to refund outstanding debt. The district encompasses approximately 710 square miles in the western section of Los Angeles County. The district is located in and includes virtually all of the City of Los Angeles and all or significant portions of the cities of Bell, Carson, Commerce, Cudahy, Gardena, Hawthorne, Huntington Park, Lomita, Maywood, Rancho Palos Verdes, San Fernando, South Gate, Vernon, and West Hollywood, in addition to considerable unincorporated territories devoted to homes and industry. Estimated enrollment for fiscal 2017 equals 625,434.

The general obligation bonds are secured by an unlimited property tax pledge of all taxable property within the district boundaries. Debt service on the rated debt is secured by the district’s voter-approved unlimited property tax pledge. The county rather than the district will levy, collect, and disburse the district’s property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds. These are strong legal and operating provisions for the collections of pledged revenues. The district has $10 billion in outstanding GO bonds and $235.5 million in outstanding lease-backed securities.

The district has an exceptionally large and diverse tax base with moderate growth expected over the near term, coupled with district residents’ below-average socioeconomic profile. Improved state funding, including one-time revenues, has helped bolster the district’s general fund reserves and liquidity to healthy levels for a district of this size. Fiscal challenges remain, however, including expenditure pressures for salary and benefit increases, rising pension costs, and an oversized, unfunded OPEB liability. Ongoing declines in enrollment and a recent decision letter on special ed spending requirements create additional, long-term challenges. The district has an elevated debt burden and a substantial remaining amount of authorized, but unissued, GO debt. The district’s pension burden is average relative to other California school districts.

(Washington, D.C.)

$576,415,000 General Obligation Refunding Bonds

Moody’s: “Aa1”  S&P: “AA”  Fitch: “AA”

Bond proceeds will refund outstanding debt. District general obligation bonds are secured by a special real property tax unlimited as to rate or base and separate from the operating levy. All property taxes are collected by a third party collection agent and the amount allocable to the special real property tax are deposited into an account held by a separate third party custodian. Weekly, the custodian makes transfers to an escrow agent in amounts sufficient to pay debt service on the bonds.

District general obligation bonds are secured by a special real property tax unlimited as to rate or base and separate from the operating levy. All property taxes are collected by a third party collection agent and the amount allocable to the special real property tax are deposited into an account held by a separate third party custodian. Weekly, the custodian makes transfers to an escrow agent in amounts sufficient to pay debt service on the bonds.

The District also has some $4 billion of debt outstanding secured by income taxes alone. Those revenues are held by the trustee outside of the District’s general fund. In each April, May and June (the period when historically most of the pledged revenues are collected), the trustee is required to transfer to the debt service fund one-third of the amount needed for the next fiscal year’s payments of principal and interest on outstanding bonds. If the set-asides in those three months are insufficient to meet debt service requirements, amounts collected in each succeeding month are required to be transferred to the debt service fund until sufficient amounts are on deposit. This feature provides five months to cure any debt service deficiency before the first debt service payment in each fiscal year is due on December 1. Only after the set-aside requirements are met are pledged revenues released to the District for deposit in its general fund.

The District economy has become increasingly diverse over the last two decades. As the economy has diversified its has led to increased development, incomes, and tax base growth. Much of this has been private sector growth which is that much more positive for the District. District management has become much more sophisticated and professional which improves the relationship between Congress and city management. District financial operations and controls are strong and the District has been able to maintain balanced operations and generate strong fund balances.



$281,715,000 REVENUE BONDS

Moody’s: Baa2  S&P: BBB+

CHOLA has been in the news for its role in providing surgery to a celebrity’s baby that has become a part of the national healthcare debate. But the focus for investors is on the credit behind the bond issue. CHLA is nationally recognized pediatric hospital, providing high acuity care across a range of specialties, and conducting significant research. It is affiliated with University of Southern California’s Keck School of Medicine and operates numerous residency and training programs.

Bond proceeds will refinance three series of outstanding debt and reimburse the hospital for $35 million of capital expenses. Bonds are secured by a gross revenue pledge. There is also a mortgage on CHLA’s primary acute care facilities that will remain in place so long as the Series 2010A or 2012A bonds are outstanding. Once the Series 2010A and 2012A bonds have been defeased, the mortgage pledge will be removed. There is a debt service coverage test of 1.1x (a consultant must be called in); 1.0x (below that is an event of default).

The rating reflects fundamental strengths of the organization, including a very strong reputation for clinical and research excellence, strong brand name and long track-record of fundraising. These strengths are offset by greater competition than is typical for children’s hospitals, very high exposure to Medicaid, and financial performance that lags peer children’s hospitals with high reliance on supplemental funding. The ability to fund raise is crucial to the credit of children’s hospitals since they tend to have a high proportion of low income and indigent patients given their orientation towards sick children. This ability to raise cash through fundraising is key to allowing these institutions to ride out the uncertainties of government funding at both the state and federal levels.



Some headlines emphasized recent comments from Moody’s Investors Service regarding Puerto Rico’s invocation of Title III under PROMESA. There was emphasis on particular language  that the action was positive – because it should provide an orderly framework to address competing creditor claims, leading to higher overall bondholder recoveries. It is true that they indeed said that. At the same time, we notice that the context of that statement was somewhat different for different categories of bondholders.

That view received more reinforcement in terms of the impact on bond insurers. The Title III proceeding is likely to eventually incorporate other securities issued by Puerto Rico’s debt-issuing entities, resulting in what will be a lengthy and extremely complex restructuring process. However, we view this as preferable to a potentially disorderly and chaotic process involving proliferating lawsuits among competing creditors and, by extension, lower loss claims on insured exposures of the financial guarantors.

As or individual bondholders without insurance the process is still seen in a positive light but Moody’s highlights that “Even if the Title III process is more orderly than the alternative, it is unlikely to be quick or easy. Puerto Rico’s restructuring will unfold in the untested legal context of PROMESA and pose legal issues that may take even more time to resolve than a large city restructuring under Chapter 9 of the US Bankruptcy Code. Congress did not authorize pension restructurings” in PROMESA’s Title VI provisions for out-of-court debt restructurings. Puerto Rico’s three primary government pension plans are projected to run out of assets between July and December, leaving the government to provide benefits from general revenue.”

The financial guarantors are in a much better position to ride out the ups and downs of a protracted legal fight and are not as concerned with day-to-day valuation issues as an individual might be. That is why we see a real difference in context in terms of the meaning of Moody’s comments for individual vs. institutional creditor interests.


Standard & Poor’s (“S&P”) on March 23, 2017, downgraded the County of Grant’s General Obligation Issuer rating from “AA-“ to “BBB+” with a “negative outlook”. The notice from this Kentucky county is innocuous enough and it is not the first time that a rating has been dropped by multiple notches. But it is another example of where smaller infrequent issuers may not get the scrutiny they deserve from the big rating agencies. In 2015, the AA- rating was assigned to the county’s general obligation bonds issued to refinance debt that funded a county owned and operated jail. The original financing dates back to the late 1990’s when the County’s sleepy 28 unit jail was expanded to a 300 unit facility.

The County had counted on the jail as a source of employment and hoped that a significant number of state inmates would be assigned to the facility. States use county facilities to house inmates with shorter sentences or to house inmates who are approaching the end of their sentences as part of an effort to transition to a post incarceration life. In addition, the County is the home of the Ark Encounter theme park. This facility includes a full size replica of Noah’s ark which was controversially financed through tax exempt industrial development bonds. The County hoped that the park would generate jobs and additional economic development and thereby generate revenues to support the County budget. While the park is estimated to have attracted some 600,000 visitors to its attractions, they apparently come and go without spending much money outside of the park.

That has become a problem for the County as the Commonwealth of Kentucky, like many other states, has  reduced the number of inmates is sends to local facilities for incarceration. This has provided less revenue from operating the facility over a period of time when the County would not raise taxes. Now the jail has become an operating albatross and a drain on the County’s finances.

While this trend has been evident for some time, S&P took no rating action until the County Fiscal Court (the County’s financial management and taxing entity) openly discussed the potential bankruptcy of the County. It is a matter of public record that the County may run out of cash by June 1. So much for being guided  by the rating agencies.


The issue of private sector involvement in public sector projects took a strange turn in South Texas recently. A Texas engineering firm, Dannenbaum Engineering, is involved in an FBI investigation which resulted in raids on multiple offices of the firm in late April. Dannenbaum has been involved in work involving entities in the City of Laredo and Webb County. Progress on these public projects involving both roads and buildings could be held up as the investigation unfolds.

Dannenbaum is one of the bidders on a traffic signal synchronization study contract which could ultimately alleviate traffic congestion on Laredo roads by synchronizing traffic lights around town. The city says the project is expected to improve travel time by reducing constant stopping and starting of traffic and increasing the number of cars that can use the road at one time.

A road project – The Hachar Loop – that Dannenbaum received a $1 million contract for in 2014, is designed to be a “six-lane freeway with two-lane frontage roads from Mines Road through the Hachar Trust Tract, ultimately extending north through the Reuthinger Tract and connecting to IH-35 in northern Webb County. The corridor’s primary effect is to provide for expedited routing of international truck cargo to newly developed warehousing centers and access to I-35.

In the FBI’s warrant to search City Hall, agents were told to collect records relating to Dannenbaum Engineering’s attempts to secure projects, including Hachar Loop, Loop 20 extension and a traffic signal synchronization study. Dannenbaum is one of the bidders on the traffic signal synchronization study contract. The study offers the opportunity to alleviate traffic congestion on Laredo roads by synchronizing traffic lights around town. The city says the project is expected to improve travel time by reducing constant stopping and starting of traffic and increasing the number of cars that can use the road at one time.

The Hachar Loop, a project that Dannenbaum received a $1 million contract for in 2014, is designed to be a “six-lane freeway with two-lane frontage roads from Mines Road through the Hachar Trust Tract, ultimately extending north through the Reuthinger Tract and connecting to IH-35 in northern Webb County. The corridor’s primary effect is to provide for expedited routing of international truck cargo to newly developed warehousing centers and access to I-35.

On May 1, City Council voted to withhold negotiating and entering into contracts with Dannenbaum pending the outcome of the FBI’s investigation, excluding the traffic light synchronization project. Dannenbaum is one of three bidders currently being looked into as part of a special procurement process by TxDOT for the light synchronization project.

As for the road, the city has funded and submitted schematic design and environmental documents to TxDOT for a portion of the proposed roadway. Webb County has started the process of acquiring consultants for the remaining section of the roadway for schematic design and environmental, according to the city. The total project is estimated to cost $31,635,324. The city will contribute $4,919,144. The total federal and state funds available for reimbursement of the project is $25,242,681.

Some are concerned that the suspension of Dannenbaum from the projects could be seen as limiting or circumventing state grant requirements which call for an open bidding process in the selection of outside contractors. It is feared that this could lead to a loss of grant monies which would threaten the financial liability of these projects.


It arrived three days beyond the required schedule but, the Florida Legislature did voted out an $82.4 billion budget. In terms of whether it will be enacted, that is a different story. The budget approved does not satisfy three of the Governor’s priorities biggest priorities, has just a fraction of the tax cuts he sought and is almost guaranteed to incur a veto.

For example, the Governor requested $100 million for tourism marketing; they gave him $25 million. $85 million in job incentives to lure businesses to Florida; they gave him zero. $200 million to speed up work on rebuilding the leaking dike around Lake Okeechobee; they gave him nothing.
Lawmakers approved some of the governor’s education priorities, such as funding Bright Futures scholarships and increasing access to charter schools. In both chambers the budget passed by more than two-thirds, the number needed to override Scott if he opted to veto the entire budget. The House voted 98-14 for the budget. The Senate voted 34-3. Scott has the authority to veto the entire budget and force the Legislature to return to Tallahassee for a special session, it’s more likely that he will veto dozens of hometown projects packed into the spending plan
The Legislature agreed to decrease property-tax rates to offset a rise in home values that would have caused many homeowners to pay more in taxes. That will save homeowners in Florida a combined $510 million in increased property taxes.
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 May 9, 2017

Joseph Krist

City of Los Angeles

$228,580,000 and $111,410,000 Wastewater System Subordinate Revenue Bonds (Tax exempt) $117,045,000 (Taxable)

Fitch: “AA”  S&P: “AA”

Subordinate lien bonds are secured by net revenues of the system after payment of O&M expenses and all senior lien requirements pursuant to the senior lien general resolution. DSC averaged a healthy 1.8x in the three years ended fiscal year (FY) 2016.  Sewer flows declined in recent years occurred as Los Angeles and the state of California weathered one of their worst modern droughts between 2013 and 2016. An increase in the pace of the city’s rate increases more than offset usage declines and improved free cash to depreciation up from just 45% in fiscal 2012 to 116% in fiscal 2016.  The system had $141.5 million of unrestricted cash and investments at the end of fiscal 2016 and $45.9 million of restricted operating and maintenance and other reserves. The system provides wastewater collection, treatment, and disposal services for an area of about 600 square miles, including most of the city and certain neighboring municipalities. Customer levels have remained virtually flat over the last five fiscal years and currently number around 685,368 accounts. The existing rate plan calls for 6.5% yearly adjustments through fiscal 2015-2021.


$412,020,000 Revenue and Refunding Revenue Bonds

(Ochsner Clinic Foundation Project)

Moody’s: A3  Fitch: A-

Newly upgraded Ochsner Clinic in New Orleans comes to market for new money and a refinancing. Ochsner is a nationally recognized tertiary and quaternary referral center with multiple access points across the state of Louisiana and parts of Mississippi. The system is known for its clinical excellence in key service lines such as cancer, neurology, cardiology, transplants, women’s and children’s services. This debt along with all outstanding Master Trust Indenture secured debt, is secured by a joint and several obligation of the Obligated Group with a gross revenue pledge as described in the bond documents. The outstanding and proposed bonds are further secured by a mortgage lien on certain properties of OCF, including OMC, certain medical office buildings and parking structures.

Moody’s upgrade to A3 reflects Ochsner’s multi-year improvement in operating performance and balance sheet metrics while delivering on key integration and synergy-producing strategies. Additionally, Moody’s cited the system’s continued investment in several strategies that has enabled Ochsner to expand its footprint across Louisiana and into Mississippi while continuing to focus on key service lines while growing the brand equity. These attributes are offset by liquidity and leverage measures that are subpar compared to similar-size peers, and the system’s location in a highly competitive area with exposure to both the energy sector and natural disasters.





Medium density fiberboard makes its return to the high yield municipal market with this issue. Previous issues to finance the conversion of wooden pallet waste into a marketable medium density fiberboard product in California and upstate New York came to inglorious ends when those facilities failed to meet revenue projections. These efforts led to significant losses for the high yield fund investors at the turn of the century.

This latest effort involves the conversion of rice stalk waste into MDF. MDF is a composite panel product created by combining cellulosic fibers with a resin binder and wax under heat and pressure. The resulting product is used for furniture, flooring, molding, and decorative plywood. Traditionally, MDF is made from wood waste and byproducts. This plant will be located in Willows, CA north of Sacramento in the north end of rice country in CA. It will be the first facility to use rice straw as the basic feedstock for MDF.

The ownership entity for the plant representing the single asset relied on to produce product and revenues to repay the bonds is a subsidiary of the State Teachers Retirement System. The plant will have its own well-based water supply and will require less than one-third of the available rice straw supply from the region. The plant is designed to address the need for alternatives to the burning of rice straw stemming from requirements dating back as far as 1991.

The deal has all of the characteristics that have troubled us about these sorts of high yield municipal bond transactions. The plant is initially driven by regulatory factors rather than economics, it comes to the municipal market driven by the need to obtain the lowest possible borrowing rate to make the economics more feasible, and it introduces a level of new technology risk to a market which has shown in the past an insufficient understanding of those risks.

So to say that we would have issues with this financing is an understatement. We’ve just seen too many of these transactions involving new technology that would more properly be financed in the taxable markets if their feasibility were more clear. So muni investors, caveat emptor!



Connecticut The Office of Fiscal Analysis downgraded anticipated revenues for the next two fiscal years by $1.46 billion — nearly $600 million next fiscal year and $865 million in 2018-19 — largely because of declining income tax receipts. Projected revenues now fall $2.2 billion, or 11.3 percent, short of the funding needed to maintain current services in 2017-18. With the potential deficit increased to $2.7 billion, or 13.6 percent, in 2018-19, the biennial shortfall approaches $5 billion.

In the short term, revenues for the current fiscal year are $413 million below anticipated levels. This pushes state finances more than $380 million into deficit and could result in the depletion of the state’s $236 million in the emergency budget reserve with less than nine weeks remaining before June 30.

Income tax receipts this fiscal year now are expected to total just under $9 billion. Not only is that well below the $9.44 billion analysts were anticipating just four months ago, but it falls short of the $9.2 billion collected last fiscal year. Income tax erosion was tied not to paycheck withholding but to quarterly filings, most of which involves capital gains, dividends and other investment-related earnings. The state’s 100 largest-income taxpayers paid 45 percent less this year than last. State analysts project next fiscal year’s sales tax receipts at $3.84 billion, downgrading their 2017-18 estimate by a fraction of 1 percent.

Pennsylvania The state Department of Revenue reported this week that it has a shortfall in excess of $1 billion 10 months into the fiscal year. That’s more than 4 percent, a bigger margin at this point than in any fiscal year since 2010. April’s tax collections came in at $537 million, or 13 percent, below expectations. In January, the Legislature’s nonpartisan Independent Fiscal Office projected a shortfall of nearly $3 billion for the two fiscal years ending June 30, 2018, including the cost to maintain the state’s current programs. April’s results would push that shortfall to more than $3 billion.

How to deal with the shortfall? Proposals from the various parties include a production tax on Marcellus Shale natural gas drilling, the privatization of Pennsylvania’s wine and liquor-store system, a massive expansion of casino-style gambling, and cuts to administrative agency budgets, prisons, school busing aid, child-care subsidies, and health care for the poor.

Kansas The state now faces projected budget shortfalls totaling $889 million through June 2019, and legislators expect to increase taxes. The state constitution prohibits a deficit. A new budget would authorize spending starting July 1, but state payroll rules require that a budget be in place by mid-June to keep employees on the job. Legislative analysts have told the House and Senate budget committees that they need to raise between $303 million and $355 million over two years, based on spending recommendations they’ve pursued. But those figures assume lawmakers divert $581 million from highway projects to education, social services and other government programs.

Michigan legislative leaders are gearing up for another push to close Michigan’s teacher pension system to new hires and move them to 401(k)-style retirement plans and then use the savings to help school districts pay down liabilities or cover up-front transition costs for the state. Leaders entered the new budget cycle with a $330 million surplus.

House and Senate budget bills up for floor votes this week would trim at least $270 million in state spending proposed by GOP Gov. Rick Snyder for next fiscal year, an amount legislative leaders have said could be used for tax cuts, infrastructure investments or debt relief. They could also look to redirect $175 million currently planned as a deposit into the state’s “rainy day” savings fund. Michigan shifted new state government employees to 401(k) plans in 1997. Michigan ended its traditional teacher pension system in 2010, moving newly hired school employees into hybrid retirement plans that include both a defined pension component and contribution component similar to a 401(k) savings plan. The new system is fully funded.

Reforms enacted in 2012 targeted unfunded liabilities. The law required retirees to pay more for their health care and capped school district contributions for unfunded liabilities at 24.46 percent of payroll. The state covers additional costs, which totaled more than $980 million this year.  Teacher retiree health care liabilities have dropped since 2012 but, unfunded pension liabilities have continued to climb. The total is now over $29.1 billion, according to an annual actuarial valuation prepared for the state at the end of fiscal year 2016.

The Senate Fiscal Agency projected last year’s legislation would have cost roughly $600 million in first-year costs, $3.8 billion over five years and $28 billion over 30 years if the state chose to wind down the system through accelerated payments, which it recommended as a best practice.

The debate comes amid the backdrop of automakers reporting the fourth straight monthly retreat in sales of new cars and light trucks, the longest stretch of declines since 2009, when the industry was embroiled in crisis and bankruptcies. The top six automakers in the American market all reported declines from their April sales a year ago, and in every case the falloff exceeded analysts’ forecasts. In April, automakers sold 1.43 million cars and trucks, down from 1.5 million a year ago.


An effort by Chicago Public Schools to save millions in future expenses by offering teachers and other staff members a financial incentive to retire has fallen short because not enough employees volunteered to leave by this summer. Veteran teachers and paraprofessionals had until March 31 to tell the district they intended to retire or resign at the end of the school year in June. An incentive written into the Chicago Teachers Union’s latest contract provided for workers to receive cash bonuses if enough of them accepted the deal. CPS has told teachers that an insufficient number of staff signed up for the program, and have asked the teachers that did say they intend to retire to decide if that is still the case by April 28.

On April 28, a Cook County judge denied CPS’ request for an injunction to block any state aid for pensions for any school district until CPS’ need is satisfied. He effectively dismiss CPS’ underlying complaint, saying it had not filed a sufficient argument under law, but would have an additional 28 days to file an amended complaint. The judge said he is sympathetic to the needs of a district like CPS that represents hundreds of thousands of poor and minority children, and termed the state’s defense of the current situation “startlingly out of touch.” However, he added CPS’ lawsuit “is not the vehicle to challenge that reality.”

Retirement-eligible teachers would have received a one-time bonus by December that paid $1,500 for each year of service. Paraprofessionals would have been paid $750 for each year of work. Those contract provisions would not kick in, however, unless a minimum of 1,500 teachers and 600 paraprofessionals participated.

CPS said about 840 teachers had submitted retirement notices. A district spokeswoman said roughly 300 paraprofessionals had planned to resign. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. Teachers hired Jan. 1 do not receive the “pickup” of their pension contributions but will get pay boosts that even out the loss of the pension pickup. Union members will also see pay hikes of 2 percent and 2.5 percent in the contract’s final two years.


There have been headlines highlighting the fact that sanctuary cities are expressing concerns in their budget messages about uncertainties regarding federal funding in light of the ongoing legal dispute with the Federal Government over the issue. The fact that cities are referencing the issue is simply the responsible thing to do as well as the politically savvy thing to do. The issue, while serious, is likely more of a political policy issue than it is a financial issue.

The Justice Department recently sent letters to eight cities – New York City, Chicago, Miami, Philadelphia, New Orleans, Las Vegas, Milwaukee and Sacramento, as well as Cook County, Illinois. DOJ asked these local governments to provide documentation that they’re complying with a federal law that requires information-sharing by local, state and federal authorities on citizenship and immigration status.

If the nine jurisdictions don’t present documentation of compliance by June 30, DOJ said it may withhold or terminate funds under the Edward Byrne Memorial Justice Assistance Grant program, which funds state and local criminal justice programs.  The scope of the threat to cities has likely been overstated in public  utterances by AG Jeff Sessions.

Justice Department and Department of Homeland Security officials who met with a mayors delegation in Washington recently indicated the only federal law at issue in the Trump administration’s effort to crack down on so-called sanctuary cities was one federal code section barring localities from interfering with communications with federal officials. A legal brief filed by the Justice Department last week in one of at least five filed lawsuits challenging President Donald Trump’s executive order threatening to take federal funds from cities, counties and states with sanctuary policies indicates that the only law Trump is seeking to enforce compliance with is 8 U.S.C. 1373, a three-decade old provision that appears to prohibit localities from issuing policies that preclude local police from communicating with federal immigration officials.

In that case, San Francisco-based U.S. District Court Judge William Orrick issued a preliminary injunction Tuesday barring federal officials nationwide from carrying out the portion of a Jan. 25 Trump executive order aimed at cutting off grants to local governments that won’t provide assistance to federal authorities in locating and detaining undocumented immigrants. Orrick cited public comments from Trump and Attorney General Jeff Sessions in concluding that the order appeared intended to sweep more broadly than allowed by federal law. The judge, an Obama appointee, called “not legally plausible” the Justice Department’s arguments that Trump was simply trying to secure compliance with current law.

“If there was doubt about the scope of the Order, the President and Attorney General have erased it with their public comments,” Orrick wrote. “The Constitution vests the spending power in Congress, not the President, so the Order cannot constitutionally place new conditions on federal funds.”

Muni Credit News May 4, 2017

Joseph Krist


Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a filing on Wednesday by the federal board that has supervised the island’s financial affairs since last year. Or so it says. So it has chosen the path of action under Title III granted to it by the PROMESA act.

There is no existing body of court precedent for Promesa. The step is an extraordinarily antagonistic one on the part of the Government who has been as intransigent in its insistence on huge haircuts while accusing creditors of being just as intransigent. It has been hard to be sympathetic to the government which has resisted efforts at disclosure and transparency and has been slow to embrace operating efficiencies at all levels of government.

The court proceedings will not be formally called a bankruptcy, since Puerto Rico remains legally barred from using Chapter 9, the bankruptcy route reserved for insolvent local governments. Instead, Mr. Rosselló petitioned for relief under Title III of the Promesa law, which contains certain Chapter 9 bankruptcy provisions but also recognizes that, unlike the cities and counties that use Chapter 9, Puerto Rico is not part of any state and must in some ways be treated as a sovereign.

Our own view is that Puerto Rico will be dealt with less harshly than it deserves. The municipal market has not seen this kind of willful inefficiency and refusal to take responsibility on this level before. Worse, the security that enticed investors was a constitutional rather than a legal pledge making the abrogation of the pledge even more egregious.


Years ago, the government of Guam borrowed hundreds of millions of dollars from the bond market to pay years of unpaid tax refunds. Three subsequent administrations did the same and at the time, it saved the local government the high cost of interest payments on refunds that were years overdue. Bonding however has become more problematic at investors have begun to look at territorial debt with a more jaded eye since Puerto Rico’s implosion.

As a result, GovGuam has decided to look for other borrowing options away from the bond market. Recently, Gov. Eddie Calvo proposed legislation that seeks to borrow from a financial institution, payable through tax and revenue anticipation notes, similar to borrowing through a line of credit. The idea is for GovGuam to borrow $75 million worth of tax refund payments from a financial institution, and then pay this off through

Under this concept, when the amount is paid off in six months or so, or by the fiscal year’s end in September, GovGuam would borrow again, at the beginning of the next year. This would allow it to issue $75 million in tax refund payments in one shot, as opposed to the current slow releases of $1 million to $3 million in tax refunds a week.

However, the governor’s proposed borrowing, using subsequent months’ revenue collections as a repayment source, might mask a larger problem: There isn’t enough cash coming into government coffers at this time, for all the bills to get paid when they’re due. Borrowing $75 million doesn’t pay off the total tax refund obligation for the year, which is estimated to cost at least $125 million. In past years, tax refund payments even topped $140 million in a year. Sen. San Nicolas has questioned this bill, and offered an alternative to GovGuam’s cash-flow struggles. Instead of borrowing, San Nicolas offered to spread out some of GovGuam’s once-a-year debt payments into smaller, more manageable monthly installments, to free up some cash flow.

Tax-refund obligations have doubled over the past decade as more federal tax credits allow more Guam residents to qualify for more tax refunds. The proposed bill from the Governor says if other sources of revenue payments won’t suffice, then the financial institution’s notes are secured through an automatic lien on Section 30 funds. Section 30 funds are remitted by the federal government to GovGuam from the collection of income tax payments from military personnel who are stationed here. The Section 30 funding, however, has fluctuated, depending on how many military personnel are stationed here, and the type of pay classifications they bring.

The situation speaks to weakness in Guam’s non-military economics. The reliance on low wage manufacturing jobs and fickle Japanese tourist demand, has made Guam’s fiscal condition vulnerable to factors largely beyond its control. That has made it hard to solidify gains from an increasing military presence  and translate those gains into a more sustainable credit in support of its financing needs.


Moody’s announced that it  has placed six Illinois public universities on review for downgrade, impacting a total of approximately $2.2 billion of public university debt. The review is prompted by failure of the State of Illinois to enact a budget providing full operating funding to the universities for the current fiscal year (FY) 2017 and resulting operational and liquidity strains on the universities.  The pressures reflected in this action have been ongoing and obvious. The liquidity crunch facing these institutions is unprecedented and the outlook for a resolution to the State’s ongoing budget standoff is poor.

The affected universities are University of Illinois (Aa3 for Auxiliary Facilities System Revenue Bonds and Certificates of Participation, A1 for South Campus Development Bonds, and A3 for Health Services Facilities System Revenue Bonds); Illinois State University (Baa1 for the Auxiliary Facilities System Revenue Bonds and Baa2 for the Certificates of Participation); Southern Illinois University (Baa2 for the Housing & Auxiliary Facilities System Revenue Bonds and Baa3 for the Certificates of Participation); Northern Illinois University (Baa3 for the Auxiliary Facilities System Revenue Bonds and Ba1 for the Certificates of Participation); Governors State University (Ba1 for the University Facilities System Revenue Bonds and Ba2 for the Certificates of Participation); and Eastern Illinois University (B1 for the Auxiliary Facilities System Revenue Bonds and Caa1 for the Certificates of Participation).

Northeastern Illinois University’s Certificates of Participation were downgraded to B1 from Ba2 and placed the rating on review for downgrade. Northeastern Illinois University is in a unique position relative to that of the other state universities in Illinois. NEIU is a regional comprehensive public university with multiple campuses in the Chicago metropolitan area. It is designated by the US Department of Education as a Hispanic-Serving Institution. The COPs are payable from NEIU’s broad budget and the obligation to pay can be terminated in the event that it does not receive sufficient state appropriations and the board determines the university does not have other legally available funds.

The idea that the State would put its universities in the position of having below investment grade debt outstanding is frankly astounding. It speaks to the intransigence of both sides in the budget dispute and the lack of political leadership in the State.


Another topic we have discussed earlier this year, is the number of state’s considering the use of mileage based taxes to fund highways as a replacement for taxes on fuel. The move towards such a technique reflects anticipated improvements in gasoline fueled engines and the potential expanded use of electric cars.

The concept of a mileage-based tax on motorists — apparently is no longer even a subject of research at the Connecticut Department of Transportation. The tax has been the subject of debate between Republicans and Democrats at the Capitol since word first broke two years ago that the DOT was researching this revenue-raising option.  Transportation Commissioner James Redeker wrote last week in a letter to a regional transportation coalition that was coordinating research into this tax that his agency was halting its involvement because of budgetary issues. The Connecticut Department of Transportation is now facing large budget cuts that prevent us from providing any state matching funds.

Connecticut has no long-range plan to fund its transportation infrastructure needs. To cover the first five years of the governor’s 30-year rebuilding program — 2016 through 2020 — Malloy proposed and secured approval to replace an older system of sharing General Fund resources with the Special Transportation Fund with a more generous plan to shift sales tax receipts into transportation.

Nonpartisan analysts warned last year that the Special Transportation Fund was projected to run $46 million in deficit beginning with the 2018-19 fiscal year — Year 4 of the 30-year program. In response, legislators decided last May to cut this fiscal year’s sales tax transfer by $50 million to help close a major deficit in the General Fund. The governor’s budget staff estimated last month that the Special Transportation Fund would finish this fiscal year $17.3 million in deficit.

So yet another aspect of Connecticut’s financial outlook is negative and the State’s credit direction is problematic at best.


Oklahoma has unsurprisingly seen its economy and revenue base negatively impacted by lower prices for oil and natural gas. The December 2016 revenue estimate for fiscal 2018 was $739.3 million, or 12.2 percent, less than the appropriated amount for fiscal 2017. Earlier this year, Governor Mary Fallin proposed a fiscal 2018 budget that recommends total appropriations of $7.8 billion, a 5.9 percent spending increase over fiscal 2017 that includes several revenue enhancements and counts $790 million in transportation funding for the first time.

The governor’s budget recommends reforms for recurring revenues and begins repairing the structural deficit, by proposing $1.5 billion in recurring revenue sources, including sales tax modernization ($839.7 million), transportation funding reform ($219.7 million) that includes increasing the gasoline and diesel excise taxes, an electric vehicle road fee ($1.4 million), and raising the cigarette tax ($257.8 million). On the spending side the budget makes $317.8 million in targeted expenditure increases across eight agencies while maintaining level funding for most other agencies.

The Department of Education would receive $60 million for teacher pay raises and $30 million for additional classroom resources; the Health Care Authority would receive $41.4 for a FMAP increase, $16.7 million for Medicaid growth and $52.9 million for a managed care implementation; the Department of Mental Health and Substance Abuse Services would receive $25 million for the state’s justice reform initiatives; and the Department of Corrections would receive $11.1 million for offender management technology and justice reform initiatives. The governor also proposes a $350 million infrastructure package that includes correctional treatment facilities and housing units, substance abuse treatment facilities and state building projects.

One other revenue enhancement showed the continuing power of the oil and gas industry in the state’s political sphere. Gov. Fallin signed legislation this week to end the state’s tax credit for wind power this year. Wind farms that start producing energy after July 1 this year will not be able to claim the credit under the new law. The credit was originally set to expire in 2021.

In a statement, Fallin welcomed the growth in wind power that the credit brought on, but said the state’s tight budget necessitated rescinding it early. Oklahoma ranks No. 3 in the country in installed wind capacity, with almost 7,000 megawatts. It provide more industry’s growth increased its use to $113 million in 2014.

As the process unfolds, signs of distress continue. Citing state budgeting uncertainties, Oklahoma transportation officials announced Monday that they have suspended construction on about a dozen highway projects, including the next phase of the I-240/I-35 interchange project in south Oklahoma City. “That’s going to give us a black eye,” Oklahoma Transportation Commission Chairman J. David Burrage said, describing the situation as “bad.” Contractors already have bought materials for projects that are being suspended and those that suffer financial losses because of work suspensions likely will file claims with the agency.

A dozen or so suspended contracts may be just the beginning of construction disruptions throughout the state as The Oklahoma Transportation Commission voted to defer action on the award of nine new highway construction projects. In addition, Commission engineers were asked to come up with a plan by May 17 “to responsibly suspend construction activities at a date to be determined later once we know the full effects of the current budget process.”

A joint Legislative appropriations committee passed a bill out of committee last week that calls for cutting the amount of income tax revenue the transportation department is scheduled to receive from $571 million to $320 million.


The spending deal reached  between Congress and the Trump administration did have some good news for municipal credits about which we had expressed some prior concern. First, the Trump administration had proposed cutting the National Institutes of Health (NIH) budget by $1.2 billion for the rest of the current fiscal year. Instead, both parties effectively ignored the White House and gave the NIH a $2 billion increase. That’s in addition to a similar budget hike the NIH secured last year, which was the largest funding boost it had received in more than a decade. Puerto Rico will receive $295 million in emergency Medicaid funding.  The agreement also does not include a rider blocking so-called sanctuary cities from getting new grant funding.

The maintenance of NIH spending takes pressure off those institutions which rely on such funding for their operations. in those cases where grant revenues are specifically pledged to bond security, the compromise is good credit news for those bondholders.


Hackensack Meridian Health and JFK Health signed a definitive agreement to merge Tuesday, creating a combined entity with 15 hospitals throughout New Jersey. The combined entity would employ more than 33,000 team members and more than 7,000 physicians on staff.

The deal, pending government and regulatory review, would combine the Hackensack Meridian system and JFK Health’s single hospital in an effort to expand patient access and deliver better outcomes by focusing on population health, the companies said. Financial terms of the deal were not disclosed. Both organizations are based in Edison, N.J.

Hackensack Meridian Health was formed after a recent merger of Hackensack University Health Network and Meridian Health, including its 28,000 employees. The health system, which is a partner with the Memorial Sloan Kettering Cancer Center, plans to launch a Seton Hall University-affiliated medical school in 2018.
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 May 2, 2017

Editors Note: Now that we are back from vacation, we hope that you notice the change in format to the We will continue our normal editorial focus but will add information on the three largest pending deals on the calendar each week in each Tuesday’s edition. On Thursday’s we will retain our historic practice of commentary on current credit events and trends.

We also feel that we have established the value of our information and insights in the marketplace. As such, over the next month, we will be converting from an unlimited access model to a subscription model. Stay tuned for more information on this change so that you may continue to benefit from our efforts.




$447,830,000* Tax exempt Bonds, $186,225,000* and

$500,000,000* Taxable Bonds and Notes

Moody’s: “Aa2”  S&P: “AA”  Fitch: “AA”

The General Revenue Bonds are the broadest pledge of the university secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, recently enacted legislation allows the Regents to pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects.

Currently, the General Revenue Bonds are the senior most outstanding obligations of the university, but the Indenture permits the Regents to incur additional indebtedness secured by a pledge and lien on General Revenues senior in priority to the General Revenue Bonds. Certain other financial obligations, including $1.1 billion revolving credit facilities, are on parity with the General Revenue Bonds.

Other bonds rated on par with the General Revenue Bonds include: The California Statewide Communities Development Authority’s Recovery Zone Economic Development Bonds (parity pledge); The California Infrastructure and Economic Development Revenue Bonds Sanford Consortium Project (university guaranty).

The reaffirmed ratings and bond sale come at a time when the University’s oversight of the system has been questioned. A new state audit that the office of the University’s CEO accumulated tens of millions of dollars in secret reserves and inappropriately interfered with the audit. The audit comes at a time when the Legislature is debating a proposal by UC to raise tuition this fall. The audit has bolstered opposition to such an increase. The debate has not been cited as a factor in the ratings.



(Owensboro Health, Inc.)

Fitch: BBB/Stable  Moody’s: Baa3/Stable

OHI is a two hospital system with the flagship hospital located in Davies County in Western Kentucky. The hospital is designated as both a sole community provider and a rural referral center. Additionally, the system offers a variety of inpatient and outpatient services that range from minor outpatient surgery to open heart surgery and complex micro vascular surgery. The bonds are secured by an interest in Pledged Revenues of the obligated group as defined in the bond documents, and a mortgage lien on certain real estate owned by OHI or Owensboro Health Medical Group. The obligated group includes OHI, which owns the hospital, and its subsidiary Cooperative Health Services and constitutes 98% of system revenues and total assets. A debt service reserve fund is in place.

As a sole community provider and rural referral center, OHI benefitted from the expansion of Medicaid under Obamacare in Kentucky. With  a leading market position in a growing primary service area, the impacts of Obamacare on revenue growth have led to  consistent operating performance, and continued absolute liquidity growth. The rating also favorably incorporates the system’s conservative debt structure and frozen pension plan.

The hospital does remain vulnerable to proposals to repeal and replace Obamacare. So the ongoing debate creates some uncertainty for the longer term outlook for the credit. This is a concern as the next step down in rating would be to below investment grade which would raise valuation and liquidity issues for bondholders.




Moody’s: Aa2 positive

The bonds are general obligation bonds, secured by the full faith and credit of the state of Wisconsin. Wisconsin is the twentieth largest state, with a population of 5.7 million. Its GDP ranks twentieth among states. While there is limited executive authority to reduce mid-year appropriations which can be a problem during times of downturn, this is offset by a fully funded pension system and limited OPEB liability. This pension position puts Wisconsin in a leading position among the states in this important credit consideration.  The value of this cannot be understated.

Moody’s assigns a positive outlook to its rating based on revenue performance which has been positive, liquidity which has improved, and conservative management of retiree benefits limits future budgetary pressures, all of which, if continued, would allow the state to improve its reserves and balance sheet.



Steve Ballmer, the former CEO of Microsoft, has announced the creation of a new website designed to look at government operations and finances from a businessman’s perspective. is the product of a research project funded by Mr. Ballmer  that seeks to mine data from federal, state, and local governments and to present it in a corporate form. In fact, its primary result is what is calls a 10K for governments.

It is an interesting effort. Its format effectively copies that of a 10K for a business. It is an effort to make government operations and finances more understandable to a “layman” and to generate an appreciation and understanding of exactly what government does and why and make government look less like a faceless bureaucracy. Whether it succeeds or not is debatable given that the resulting document is 170 pages long and as exciting to read for the average person as a corporate 10K might be. Mr. Ballmer insists that he has no political agenda but it is fairly clear that he is not ideologically opposed to big government.

As a municipal analyst, I find the most useful result of the effort to be the complexity of the resulting product. The report relies on many diverse sources of data which it acknowledges do not necessarily present information in ways which comport with governmental accounting standards, varying state legal requirements, or simply the realities of reporting requirements in the municipal bond market. As such, it makes clear to those who criticize the municipal market or who devalue the usefulness of the municipal analyst community that their perceptions are likely quite off the mark.

Selfishly, we hope that the effort helps to increase the value of efforts such as ours to illuminate the world of municipal bonds and credit.


Kansas collected $424.8 million in total revenue for the month of March and $4.2 billion for the current fiscal year. The total puts all revenue collections $57.5 million more than estimates for the fiscal year to date. Total tax collections were $11.6 million below expectations for the month. State sales tax receipts were $2.3 million more than anticipated while individual income tax receipts were $11.1 million below expectations for March. “Although withholding receipts grew $7.6 million compared to the prior year, that was offset by $12.3 million more in refunds paid out this month compared to March 2016, pulling individual income tax receipts below estimates,” said Revenue Secretary Sam Williams. “The March revenue receipts continue the trends we have seen over the last few months – withholding and state sales tax collections continue to improve, reflecting an encouraging job and consumer environment for Kansans.” Earlier this year, the Internal Revenue Service announced it was holding all refunds for taxpayers claiming Earned Income Tax Credits and Additional Child Tax Credits until mid-February for extra scrutiny as a fraud prevention measure. The delay also pushed back when Kansas received many of those returns, so refunds typically paid in late-January or February are being paid out in March.


Southern Company had previously reported Georgia Power’s entry into an Interim Assessment Agreement (the “Interim Assessment Agreement”), on behalf of itself and as agent for the other Vogtle Owners, with the Contractor, the bankrupt entity Westinghouse. The term of the Interim Assessment Agreement was originally scheduled to expire on April 28, 2017. On April 28, 2017, Georgia Power (for itself and as agent for the other Vogtle Owners), the Contractor, and WECTEC Staffing entered into an amendment to the Interim Assessment Agreement solely to extend the term of the Interim Assessment Agreement through the earlier of (i) May 12, 2017 and (ii) termination of the Interim Assessment Agreement by any party upon five business days’ notice. The other terms of the Interim Assessment Agreement remain unchanged.

Georgia Power, for itself and as agent for the other Vogtle Owners, is also negotiating a new service agreement which would, if necessary, engage the Contractor to provide design, engineering, and procurement services to Southern Nuclear Operating Company, Inc. (“SNC”), in the event SNC assumes control over management of construction of Plant Vogtle Units 3 and 4.

Georgia Power and the other Vogtle Owners are continuing to conduct a comprehensive schedule and cost-to-complete assessment, as well as a cancellation cost assessment, to determine the impact of the Contractor’s bankruptcy filing on the construction of Plant Vogtle Units 3 and 4 and to work with the Georgia Public Service Commission to determine future actions related to Plant Vogtle Units 3 and 4.

SCANA Corporation (SCANA) and Santee Cooper announced that the Interim Assessment Agreement with Westinghouse Electric Company, LLC concerning the nuclear construction project at the V.C. Summer Nuclear Station has been amended. The primary amendment is the extension of the term of the agreement through June 26, 2017, subject to bankruptcy procedures. The agreement allows for a transition and evaluation period, during which South Carolina Electric & Gas Company (SCE&G), principal subsidiary of SCANA, and V.C. Summer Nuclear Station project co-owner, Santee Cooper, can continue to make progress on the site.

During this period, Fluor will remain in its current role, and the project’s co-owners will continue to make weekly payments for work performed during the interim period. The agreement extension allows the co-owners additional time to maintain all of their options by continuing construction on the project, while examining all of the relevant information for a thorough and accurate assessment to determine the most prudent path forward.

So both of the municipal entities (MEAG and Santee Cooper) are giving themselves additional time to review their options which include a potential cancellation. They have however, established different timelines for their respective processes. economics will likely determine the final outcome but other matters may intervene. A recent example involves the essential technology, which is considered the “intellectual property” .The “debtor-in-possession” financing being sought by Westinghouse to pay bills while reorganizing during the Chapter 11 case could threaten the ownership of the AP1000 technology, according to an objection to the DIP financing filed last week by the Georgia plant’s owners. “The owners object to the DIP financing motion to the extent it proposes to grant the DIP lenders liens on the intellectual property,” which is the technology needed to complete the project at Vogtle, the filing said. A similar objection has not yet been filed by SCANA (SCG) or Santee Cooper.  Ongoing construction is being funded by the lead investor-owned utilities.


The Oakland A’s may have huge stadium issues at the major league level having seen numerous proposals come and go to replace its outmoded home originally built for the departing Oakland Raiders football team. That has not been the case for its teams at the lower levels of its minor league system. A’s affiliate, the Midland Rockhounds, has been playing in a modern minor league ballpark which was municipally financed in 2000 and 2001. Unlike many other such ventures, this one may actually have worked out for the sponsoring municipality, Midland TX.

The Midland City Council is anticipated  to approve a recommendation to pay off the debt related to the construction of the Scharbauer Sports Complex. The bonded debt for the stadium is payable from the city’s sales tax.  Should the council vote to pay off the debt it would also end the tax. It would stop being collected later this spring. Unless voters approve an extension, the city’s sales tax would return to 8 percent from 8.25 percent. The bonds related to the sports complex totaled $15.698 million, including $2.078 million in interest. The city expects to save approximately $1.323 million in interest payments versus paying off the debt in 2022.

If voters approve the 4B extension, the city’s sales tax would remain at 8.25 percent. Even after paying off the debt related to the construction of the complex and using 4B revenue for maintenance, operations and capital expenditures, there will be $27.939 million left over, according to City Finance Director Pam Simecka.

That revenue stream is attractive for city and community leaders with eyes on improvements. Expectations are a new 4B could raise as much as $10 million or $11 million a year. Over the 15-year life of the tax, that could be $150 million, plus the leftover $27.9 million.


On December 13, Washington State Governor Jay Inslee delivered a budget proposal covering fiscal 2018 and fiscal 2019, calling for $95 billion in spending from all fund sources over the next two years on operating expenses plus transportation capital costs. This includes $46.4 billion in general fund spending (including several other accounts including the Education Legacy Trust Account, Opportunity Pathways Account, and Budget Stabilization Account), compared to the $38.45 billion enacted budget for the current biennium. The budget assumes a 6.7 percent general fund revenue increase (before policy changes proposed by the governor).

The first priority of the governor’s budget is to fully fund K-12 education; the state must develop a detailed plan to comply with a 2012 state Supreme Court order over school funding. The governor’s proposed K-12 package would send $2.7 billion in additional dollars to local school districts for employee compensation, as well as $1.1 billion to continue reducing class sizes, address opportunity gaps and other strategic priorities, and $1 billion for new school construction.

To help finance this package and other initiatives, the governor proposes net new revenues totaling $4.4 billion over the biennium, including increasing the business and occupation tax rate ($2.3 billion), a new tax on carbon pollution ($1.1 billion), and a new tax on capital gains ($821 million). The budget also prioritizes several initiatives to overhaul the state’s mental health system and expand community-based services, directs $56 million to higher education institutions to freeze tuition for two years, and funds a modest pay increase for most government employees.

The problem is that one of the State’s sources of high wage industrial employment, Boeing, has been pursuing a fairly relentless series of job cuts at its Everett site. The company told staff in a memo Monday that “hundreds of Engineering employees” in Washington state will receive layoff notices on April 21. This follows a round of voluntary buyouts Boeing offered in January. That proposal was accepted by more than 300 engineering staff and 1,500 members of the Machinists union. About 1,000 machinists who accepted that buyout offer will leave permanently on the 21st as well. In late March, Boeing issued an earlier round of 245 involuntary layoffs, including 62 engineering staff and 111 machinists, that will take effect in mid-May.  Boeing cut almost 7,400 jobs in the state last year. The actions followed on the heels of a decision to cut 777 production in Everett from seven planes per month to five per month beginning in August.

So we will see how this budget plan actually looks like after the legislative process given the changing job outlook in the State.


Gov. Eric Holcomb signed into law Thursday afternoon effective starting July 1, that will require Hoosiers to pay an extra 10 cents per gallon gas tax to help pay for roads plan. The tax at the pump will rise to 28 cents a gallon. Hoosiers also will pay more fees at the Bureau of Motor Vehicles, starting in January. Under the roads plan approved by state lawmakers this past week, registration fees for most vehicles will rise by $15. The new law also imposes a $50 on hybrids and a $150 fee on electric cars. In addition to taxes and fees, the roads plan also helps to clear the way for tolls on interstates, though that option may be several years away.

Holcomb said he plans to have a draft of a toll road plan by the end of 2018. Indiana’s gas tax rate will now be higher than all its neighboring states, according to numbers from Tax

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.