Monthly Archives: July 2017

Muni Credit News July 27, 2017

Joseph Krist

Senior Municipal Credit Consultant



The government’s chief financial officer, asked the agencies to cut an additional 5 percent of the current budget in order to add $100 million to the government reserve requested by the fiscal control board. The purpose of the request is to add initiatives to avoid a reduction in the working hours of public employees or the elimination of their Christmas bonus on Sept. 1, the date imposed by the board for the government to demonstrate how it will put into effect the more than $400 million in cuts this fiscal year, which began in July.

At the same time, the Treasury secretary said that before the end of July his agency would send about $50 million in taxpayer refunds and that the rest—roughly $105 million more—would be sent in August to some 55,000 people. In fact, reimbursements are also a reason why the government requested an additional 5 percent budget cut to its agencies.


It has been legal to sell marijuana for adult recreational use in Colorado since January 1, 2014.In the ensuing period, The state of Colorado has received more than half a billion dollars in cannabis-related revenue since legal adult cannabis sales began. Revenues are generated through a 15 percent excise tax on wholesale sales of cannabis; a 10 percent special sales tax on retail sales; applying the standard 2.9 percent state sales tax to adult-use and medical cannabis; and the application and licensing fees paid by adult-use and medical cannabis businesses. Local governments in Colorado are generating significant annual revenue by levying standard local sales taxes on cannabis products, enacting special cannabis-specific taxes, and collecting local application and licensing  fees. Localities also receive a portion of the cannabis tax revenue collected by the state government.

So what is the money used for? In FY 2016 and 2017, $117.9 million was used to fund school construction projects, and an additional $5.7 million was distributed to the Public School  Fund; $5.8 million was allocated for school drop-out prevention programs and bullying prevention and education, plus more than $4.5 million for grants to increase the presence of school health professionals; more than $16 million was allocated for substance abuse prevention and treatment, and $10.4 million was used for mental and behavioral health services.


In a move that will please providers of and investors in mass transportation, The Senate Transportation, Housing and Urban Development, and Related Appropriations Subcommittee today approved its FY2018 appropriations bill with funding to advance transportation infrastructure development.  The bill provides $19.47 billion in discretionary appropriations for the U.S. Department of Transportation for fiscal year 2018.  This is $978 million above the FY2017 enacted level.  Within this amount, priority is placed on programs to improve the safety, reliability, and efficiency of the transportation system.

Especially pleasing to transit advocates is the fact that the bill includes $550 million, $50 million above the FY2017 enacted level, for TIGER grants (also known as National Infrastructure Investments). A House proposal more reflective of trump administration priorities would eliminate this program which has widespread support at the local level. In addition, the Senate bill calls for $12.129 billion for the Federal Transit Administration (FTA), $285 million below the FY2017 enacted level.  Transit formula grants total $9.733 billion, consistent with the FAST Act.  The bill provides a total of $2.133 billion for Capital Investment Grants (“New Starts”), fully funding all current “Full Funding Grant Agreement” (FFGA) transit projects, which is $280 million below the FY2017 enacted level.

Heavy rail will benefit as well with the Senate proposing $1.974 billion for the Federal Railroad Administration (FRA), $122 million above the FY2017 enacted level.  This includes $1.6 billion for Amtrak for the Northeast Corridor and National Network, continuing service for all current routes.  The bill also provides $250.1 million for FRA safety and operations, as well as research and development activities.

The bill also provides $92.5 million for the Consolidated Rail Infrastructure and Safety Improvement grants program, of which $35.5 million is for initiation or restoration of passenger rail, $26 million for Federal-State Partnership for State of Good Repair grants, and $5 million for Restoration and Enhancement grants.


 Housing is another sector receiving Senate support despite a lack of interest from the Trump administration. HUD would receive $40.244 billion in discretionary appropriations, an increase of $1.4 billion above the FY2017 enacted level. The bill includes support for HUD rental assistance programs which provide housing assistance for nearly 5 million vulnerable families and individuals.  Of those receiving assistance, 57 percent are elderly or disabled.  This bill provides necessary increases to continue assistance to all families and individuals currently served by these programs.

Included in the bill is:  $21.365 billion for tenant-based Section 8 vouchers, $1.07 billion above the FY2017 enacted level; $6.45 billion for public housing, $103.5 million above the FY2017 enacted level; $11.5 billion for project-based Section 8, $691 million above the FY2017 enacted level; $573 million for Housing for the Elderly, $70.6 million above the FY2017 enacted level, and $147 million for Housing for Persons with Disabilities, nearly $1.0 million above the FY2017 enacted level.

All of these are categories which receive some level of capital funding through the municipal bond market.


The Senate Appropriations subcommittee on transportation agreed to raise the federal cap on so-called passenger facility charges from $4.50 to $8.50 per flight, or $34 for a connecting round-trip. Airports have urged a hike in the fees as a way to fund construction projects such as improving terminals, with $100 billion in projects looming over the next five years. The airline industry strongly opposes the provision as a “secret tax hike”.

Airports issue bonds backed by passenger facilities fees as a way of keeping terminal rental and airline landing fees lower. These revenues can be applied solely to general airport revenue bonds. Airlines don’t like the fees because they appear on the passengers’  tickets thereby making the cost of a flight more expensive. The Senate legislation must still be reconciled with the House, which didn’t include a fee hike in its version of the bill.

The debate comes amid the release of first quarter airline fare trends. The average domestic air fare decreased to $352 in the first quarter of 2017, down 5.0 percent from $370 in the first quarter of 2016, adjusted for inflation but up 1.5 percent from $347 in the fourth quarter of 2016, the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported. The average domestic one-way air fare was $256 in the first quarter of 2017, while the average round-trip air fare was $417. Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase. The first quarter fare of $352 was the lowest first-quarter fare in the 22 years since BTS began collecting air fare records in 1995. The previous low was $370 in the first quarter of 2016. The first-quarter 2017 fare was down 28.3 percent from the average fare of $491 in 1999, the highest inflation-adjusted first quarter average fare on record.


The US Bureau of Labor Statistics released data this week on job growth trends across the country.  From September 2016 to December 2016, gross job gains from opening and expanding private-sector establishments were 7.5 million, a decrease of 185,000 jobs over the quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private-sector establishments were 7.1 million, an increase of 127,000 jobs from the previous quarter. The difference between the number of gross job gains and the number of gross job losses yielded a net employment gain of 376,000 jobs in the private-sector during the fourth quarter of 2016.

In the fourth quarter of 2016, gross job losses represented 5.8 percent of private-sector employment. Gross job losses are the result of contractions in employment at existing establishments and the loss of jobs at closing establishments. Contracting establishments lost 5.7 million jobs in the fourth quarter of 2016, a decrease of 6,000 jobs from the prior quarter. In the fourth quarter of 2016, closing establishments lost 1.4 million jobs, an increase of 121,000 jobs from the previous quarter.

If one were to look at recent budget trends across the states, one might see a correlation. Gross job gains exceeded gross job losses in 41 states, the District of Columbia, and Puerto Rico in the fourth quarter of 2016. Over this period, 25 states exceeded the U.S. rate of gross job gains as a percent of employment, which was 6.2 percent.

Alaska had the highest rate of gross job gains as a percent of employment, at 9.6 percent. Alaska also had the highest rate of gross job losses as a percent of employment at 10.0 percent, above the national rate of 5.8 percent. Connecticut had the lowest rate of gross job gains as a percent of employment at 5.1 percent. Tennessee had the lowest rate of gross job losses as a percent of employment at 5.0 percent.


Transportation has rightfully been sighted as the major sticking point holding up Wisconsin’s adoption of a new biennial budget. Education funding with its implications for school finance at the local level is also serving to hold things up. A new plan in the State Senate would increase per-pupil funding, from the current $250 to $654 over the biennium, and additional dollars for low-spending districts and private schools that take part in one of the state’s four voucher programs. It raise the income cap on the statewide Parental Choice program, which allows students outside of Milwaukee and Racine to attend private schools on vouchers. The cap would be raised from the current 185% of the federal poverty level to 220%, or about $54,120 for a family of four. At 220%, the Senate proposal would cost about $4.4 million, though that would be passed on to the local public schools, and is projected to increase enrollment in the statewide program by about 550 students.

Governor Walker’s  proposal would raise the state’s per-pupil aid from the current $250 to $450 in 2017-’18 and $654 in 2018-’19, at a cost of about $505 million. Revenue limits, which control how much districts can raise from the state and local taxpayers, remain unchanged for most districts. But low-spending districts, which were locked into those rates when revenue caps were imposed in the 1990s,  would be allowed to gradually raise their spending to $9,800 per student by 2022-’23.

Concurrently, it would increase funding for all four of the state’s private school voucher programs, however, most of the increase would be passed on to local public school districts in the form of cuts to their state aid. Per-pupil payments for the Milwaukee, Racine and statewide Parental Choice programs would rise from the current $7,323 to $7,757 in 2018-’19 for K-8 students and from $7,969 to $8,403 for high-schoolers. Per-pupil payments for students in the special needs scholarship program would rise from the current $12,000 to $12,434 in 2018-’19.

Clearly the trend is towards private schools and away from the public school system. This has negative implications for local school district tax pressures.

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 July 25, 2017

Joseph Krist

Senior Municipal Credit Consultant


$608,000, 000


Intermediate Lien Revenue Bonds

Moody’s Rating: “A1”
S&P’s Rating: “A+”
Fitch’s Rating: “AA-”

The Port of Seattle is a municipal corporation of the state of Washington and owns the port’s marine facilities at the Seattle Harbor, the Seattle-Tacoma International Airport, and various industrial and commercial properties. The port operates Seattle-Tacoma International Airport (Sea-TAC), the primary regional air passenger service provider with a virtual monopoly in the Seattle area (69.4% origination and destination for FY 2016). The port has large and diverse revenue streams between and within its airport, seaport, and other divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County.

The airport division contributed roughly 78% of 2016 total operating revenues while other businesses generated 22% of revenues. The port’s debt service coverage ratios (DSCRs) for senior, intermediate, and all-in coverage were 5.9x, 1.8x, and 1.7x respectively in 2016.



Water and Wastewater Revenue Refunding Bonds

Fitch: “A+”
Moody’s: “A1”
S&P: “A+”

Proceeds will be used to current-refund all or a portion of the city’s outstanding series 2007B and advance-refund all or a portion of the outstanding series 2010C and 2012 bonds for savings and pay issuance costs. The majority of the savings, which will be taken annually, are expected to occur at the end of the scheduled amortization through 2032.

The bonds are secured by a senior lien on sewer combined net revenues of the Philadelphia Water Department’s (PWD) water and system. Philadelphia has historically had a problem with revenue collections for its municipally owned utilities.  Recently, Philadelphia announced a first-of-its-kind program to address the fact that some more than 40 percent of the city’s water utility customers are delinquent in paying their water bills, to the tune of about $242 million in uncollected revenue.

The city is attempting to take an approach which will charge lower water rates for households with incomes at or below 150 percent of the federal poverty line (which is roughly $3,075 a month for a family of four). Participating households will pay between 2 and 4 percent of their monthly income, which could mean bills as low as $12 a month. In 2016, a Philadelphia resident paid an average of about $71 a month in combined water, sewer and storm water charges. The city estimates that as many as 60,000 households are eligible for the income-based program.

The Philadelphia Gas Works operates a similar billing scheme. On the basis of that experience in part, legislation for a program for the water system was approved by the Philadelphia City Council in 2015. Research has shown that when gas and electric utilities charge affordable rates, customers tend to keep current with their bills. The Gas Works credit has seen pressure on it reduced as it has reformed its operations.



Moody’s announced that it had assigned a Aa3 rating Kentucky Turnpike Authority’s Economic Development Road Revenue Bonds. In reviewing that credit, Moody’s also took the opportunity to downgrade Kentucky’s general fund appropriation lease-revenue bonds to A1 from Aa3, Kentucky’s agency fund appropriation lease-revenue bonds to A2 from A1, the Kentucky Public University Intercept Program programmatic rating to A1 from Aa3 and the Kentucky School District Enhancement Program programmatic rating to A1 from Aa3.

The wide ranging action reflects “revenue underperformance that will challenge the commonwealth’s ability to increase its very low pension funding levels. The commonwealth has one of the heaviest unfunded pension burden of all states. The commonwealth high fixed costs will also restrict fiscal flexibility.” Kentucky’s pension funding position has been among the weakest of all the states. While some recent steps have been taken by the Legislature to address the underfunding, the market has long perceived them to be inadequate and now the rating agencies are following that view.

Kentucky does not issue general obligation bonds itself but relies on lease-revenue bonds which are secured  by a state appropriation of rental payments either out of the general fund or agency funds. The downgrade of the lease-revenue bonds reflects their subject-to-appropriation nature, as well as relatively strong legal structure and essentially. The downgrade of the state aid intercept programmatic ratings reflects the one-notch differential between them and that of the commonwealth. The one-notch differential reflects generally average to strong state commitment, program history and program mechanics.

The downgrade impacts not only the Commonwealth’s cost of borrowing but also impacts those costs for its university systems, school districts, and localities which rely on state support for their borrowings.


Columbia Pulp, LLC is planning to develop and build a 140,000 ton per year pulp mill on a 449 acre site near the Lyons Ferry Bridge in Columbia County, Washington. The site is located in the heart of one of the densest wheat farming regions in North America. Farmers in eastern Washington pay millions of dollars annually for the right to burn straw, an excess by-product from wheat farming, resulting in thousands of tons of greenhouse gas emissions. An obvious, low-cost raw material, wheat straw has eluded commercialization by the North American paper industry due to limitations of existing pulping technologies.

Columbia Pulp will build and operate a facility in eastern Washington using a proprietary process to profitably convert straw into three product streams – pulp, sugars,  and lignin. The effort to finance the project has taken a number of twists and turns. It was the original plan to market bonds issued by the Washington Economic Development Finance Authority before the end of 2016. The company had received indications that an investor was going to buy at least half of the bonds,” according to the company. “It hadn’t even gone to market yet, but then the equity supplier couldn’t come up with the money.

The company then had to wait until the state reallocates bonds for 2017.  Now that it has done so the bonds can be issued but rates have risen. The company had designed its business plan around a 6-percent rate for the bond, now they’re looking at 8.5 or 9 percent. Once financing is secured, construction will begin immediately.

So once again the municipal high yield market will be tested with one of our least favorite credit mixes. The plant uses an unproven technology to produce a product for which there is no established market. The credit is non-recourse to any revenues or assets outside of the project. Throw in the inherent construction and startup risk that exists with any large scale industrial equipment construction and you have a formula for a very high risk speculative credit. Wood waste to fiberboard, manure to methane, rice straw just to name a few make one ask will the municipal market never learn?


The director of the Wisconsin Legislative Fiscal Bureau has opined that the recently passed Illinois budget would negatively affect Wisconsin state revenues. Wisconsin has had an income tax reciprocity agreement with Illinois since 1973, where residents of each state who earn personal service income in the other state file a tax return and pay taxes on that income only in their state of residence. The reciprocity agreement  with  Illinois requires a compensatory payment when the net foregone revenues of one state exceed those of the other state based on a benchmark study of 1998 tax returns filed in the two states. Because the number of Wisconsin residents earning personal service income in Illinois exceeds the number of Illinois residents earning personal service income in Wisconsin, taxes foregone by Illinois exceed taxes foregone by Wisconsin,  and Wisconsin makes a reciprocity payment to Illinois each year based on the estimated difference. The payment is made each December from a sum sufficient GPR appropriation.

In the Governor’s budget, Wisconsin’s income tax reciprocity payment to Illinois is estimated at $66 million in 2017-18 and $67.6 million in 2018-19. The Bureau and the Department Of Revenue have re-examined the reciprocity payment estimates in light of the provisions in Illinois P.A. 100-0022 increasing Illinois’ individual income tax collections in 2017-18 and arrived at similar results. The recently enacted Illinois tax provisions are expected to increase Wisconsin’s 2018-19 reciprocity payment by an estimated $22.8 million to $90.5 million. However, based on income tax collections for both states through June, Wisconsin’s 2017-18 reciprocity payment is now estimated to be $64 million, or $2 million, lower than the amount  in the Governor’s budget. Combined, the re-estimates for the two years are $20.7 million higher than the amounts in the Governor’s budget.

The Illinois tax changes will also result in Wisconsin residents claiming larger credits for taxes paid to other states. Higher credit amounts will first occur in tax year 2017, and higher credit amounts in subsequent years will affect estimated tax payments. As a result, Wisconsin individual income tax collections are estimated to be lower by $12.9 million in 2017-18 and $17.2 million in 2018-19. When combined, the reciprocity and tax credit changes  are estimated to adversely affect the general fund’s position by $50.8 million in the 2017-19 biennium.


With its ratings under threat, the Pennsylvania legislature continues to debate how to fund the spending part of the budget which Gov. Wolf let take effect nearly two weeks ago without his signature. House members had rejected “in significant fashion” a plan to leverage annual payments from a 1998 multi-state settlement with tobacco companies to borrow enough money to cover a massive deficit in state finances. Alternative proposals have been floated to raise taxes on electric and natural gas utility bills, telephone services and cable bills.

The budget stalemate has also stalled nearly $600 million in state support for the University of Pittsburgh and Penn State, Temple and Lincoln universities, as well as the University of Pennsylvania’s veterinary school. If this all sounds familiar, it should as the Commonwealth is beginning to act along the lines of Illinois in terms of letting its budget problems bleed down to its educational institutions and non-profit service providers. We know how that turned out.


The Westchester County Health Care Corporation (dba Westchester Medical Center). Its main campus is leased from Westchester County. The Medical Center consists of four major facilities with 895 total beds. The major facilities comprising the Medical Center are: the main hospital in Valhalla, the Behavioral Health Center at Westchester, the Maria Fareri Children’s Hospital on the Valhalla Campus and the MidHudson Regional Hospital in Poughkeepsie, NY. Effective March 30, 2016 WCHCC entered into an affiliation agreement with HealthAlliance and WMC-Ulster, in which WMC-Ulster became the sole member of HealthAlliance.

Debt is rated Baa2 by Moody’s. The change in the outlook to negative reflects weak and lower than expected liquidity and significant challenges to restoring liquidity, increasing capital spending and likely leverage, and modest margins. Liquidity at FYE 2016 was notably weaker than expected, primarily due to a delayed large Medicaid supplemental payment. Although WMC received the payment in the first quarter of 2017, liquidity declined further due to the timing of a pension contribution and a NYSNA settlement, highlighting material quarterly variability. Challenges to restoring and sustaining liquidity include unpredictability of Medicaid payments, increasing capital spending which may require equity and spending in advance of state grant reimbursement, and the potential impact of installing a new IT platform.

WMC guarantees annual debt service for CHS. CHS is comprised of Good Samaritan Hospital of Suffern, N.Y., Bon Secours Community Hospital in Port Jervis, and St. Anthony Community Hospital in Warwick. CHS’s bonds are secured by gross receivables of the obligated group, which includes the hospitals only and excludes physician-related entities.

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 July 20, 2017


The first legal challenge to the proposed restructuring plan for the Government Development Bank (GDB) debt using an agreement with creditors under Title VI of Promesa that was approved by the island’s financial control board last week. The lawsuit—which names the GDB, the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA) and the Municipal Revenue Collection Center (CRIM y its Spanish acronym) as defendants—contends the bank’s restructuring support agreement (RSA) violates the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) and is unconstitutional.

The remedies sought by the city—the first to challenge the GDB’s restructuring deal—include a court order declaring Caguas’ rights as debtor may not be the object of a “qualifying modification” under Title VI of the federal law. The city claims in its suit that “to benefit a select group of creditors of the GDB, at the expense of the Municipality, its constituents and other creditors, the GDB and FAFAA are pursuing an unlawful arrangement, purportedly under the color of law, compelling the Municipality to not only receive the funds it holds at the GDB at a discount, but despite such loss, requiring that the Municipality continue repaying its municipal loans owing to the GDB in full (other than with respect to undisbursed loan proceeds), and in some cases, perplexingly also requiring the Municipality to make loan repayments it has already made under such loans, as if they had not been previously made.”

Caguas had approximately $230.3 million in debt, of which $81.1 million is owed to the GDB. Under the GDB’s advice, Caguas says it incurred in debt using its primary revenue sources for repayment. These include property, sales, operating and gross income taxes.


Creditors of the Puerto Rico Electric Power Authority (PREPA) are seeking to lift the Promesa law’s stay and appoint an independent receiver for the utility to oversee certain operations of the public corporation and which could result in increased rates. The motion, which has more than 1,000 pages, was filed Tuesday by National Public Finance Guarantee Corp., the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Syncora Guarantee Inc. They seek to enforce their rights after the island’s financial oversight board rejected PREPA’s deal to restructure its roughly $9 billion debt.

The motion comes a day after National and Assured amended a complaint they filed in June, in a separate process in U.S. district court against the fiscal board. the insurers modified their complaint to instead have the court declare that the RSA was a “preexisting voluntary agreement” as defined by Promesa—and thus had to be certified—and that the board’s failure to approve the RSA was unlawful under the federal law.


Federal Bankruptcy Judge Laura Taylor Swain approved an agreement struck between the Puerto Rico government and a group of bondholders of the island’s Employees Retirement System (ERS). In the stipulation agreed to, she also scheduled a hearing for Oct. 31, during which the court expects to address a key dispute between the commonwealth and ERS bondholders over rights and remedies related to bonds secured by the government’s employer contributions to the retirement system.

According to the deal, the commonwealth will set aside more than $90 million through the next three months and a half, as well as pay roughly $14 million monthly in interest payments due through October—including a missed payment on July 1. These actions stay the ERS bondholder group’s petition for immediate relief and “adequate protection” as part of the ERS’s bankruptcy case under Title III of the federal Promesa law. By July 21, moreover, the government will commence an adversary action to have the court decide over the “validity, priority, extent and enforceability” of the liens and security interests asserted by the ERS bondholders, as well as the commonwealth’s rights over employer contributions received by ERS in May.

The stipulation calls for payment of some $14 million in interest due July 1 and missed by the ERS, after commencement of its Title III bankruptcy case. The ERS will also pay subsequent monthly interest payments until Oct. 1, or about $42 million in total. These payments will be covered by funds set aside by the commonwealth since January, pursuant to a previous stipulation struck between ERS and its creditors early this year. The commonwealth will set aside $18.5 million in a segregated account on July 31, Aug. 31, Sept. 31, Oct. 31 and two days after Judge Swain’s approval of the stipulation, or July 19, in addition to any money related to employer contributions made by the commonwealth to the ERS in late May.

During the Oct. 31 hearing, Judge Swain will address each side’s final arguments on these issues.


That sound you hear is a big sigh of relief over this week’s action or lack thereof on the plan to repeal and replace the ACA. There is no doubt that the short term result is positive for both state credits and healthcare credits. But the uncertainty resulting from the President’s reaction that he will “let Obamacare die” will hang over these sectors nonetheless.

First of all, does “let Obamacare die” mean withdrawing subsidies from insurance companies as soon as next month for those who participate in the state marketplaces? If it does, then that death will be significantly hastened. Second, if letting it die extends into 2018 then significant numbers of individuals will likely forego insurance do to its expense and the pressure on hospital operating budgets from the provision of un reimbursed care will begin to emerge. Third, state governments will then be under pressure to fill some of the gap as fiscal 2019 budgets are formed in the form of higher charity care subsidies to providers.

There is no doubt that the events of this week are positive for the two sectors. we just express caution over their staying power as positive drivers of credit performance over any extended period. For example, the  renewed effort at repeal would have ghastly consequences should it succeed. The CBO scoring of the latest iteration of repeal shows the number of people who are uninsured would increase by 17 million in 2018, compared with the number under current law. That number would increase to 27 million in 2020, after the elimination of the ACA’s expansion of eligibility for Medicaid and the elimination of subsidies for insurance purchased through the marketplaces established by the ACA, and then to 32 million in 2026.

Average premiums in the nongroup market (for individual policies purchased through the marketplaces or directly from insurers) would increase by roughly 25 percent—relative to projections under current law—in 2018. The increase would reach about 50 percent in 2020, and premiums would about double by 2026.

All of which would be negative for the state and hospital credit sectors.


In his January 2017 State of the State address, Governor Rick Snyder announced the creation of a task force focused on addressing the unfunded pension and retiree health care liabilities of local governments in Michigan.  Of the approximately 1,800 local general purpose governments in Michigan, roughly one third provide post-retirement benefits. Due to a multitude of factors, many communities are now facing challenges funding the benefits to retirees. The total unfunded pension liability is estimated to be around $7.46 billion. The total unfunded liability for retiree health care is estimated at $10.13 billion. It is estimated that, for many Michigan cities, roughly 20 cents on the dollar goes to pay pension and OPEB costs.

the Task Force agreed on four main recommendations:  Greater reporting and transparency must be required of all local units to ensure a full understanding of the size and scope of the problem, and where the biggest challenges exist. This includes reporting using uniform assumptions to allow for better comparisons.  A pension and OPEB fiscal stress test system for local governments should be created to alert and assist local units in crafting solutions to best position them to continue to serve their residents, while funding their obligations and protecting benefits for employees and retirees. This system should identify and focus action on the local units experiencing the greatest fiscal stress.  This system, along with the creation of a new Municipal Stability Board (MSB), should assist in the review of a local unit’s finances and the development of a corrective action plan. The MSB should also provide research, training and technical assistance.  In addition to meeting existing constitutional and statutory requirements to pay pension costs, going forward all local governments should meet a minimum requirement to pay OPEB normal costs for new hires (i.e., to prefund new active employee’s current year obligation), if offered.

there were a few key issues for which there was fundamental disagreement:  Some Task Force members were opposed to the establishment of new funding requirements, concerned it would have too severe an impact on the local government’s ability to provide current services. While they recognized these liabilities as important, they maintained that the focus should be on making benefits more affordable and having adequate cash flow to maintain current services.  A majority of Task Force members were opposed to the establishment of plan design requirements for all local governments, believing that the local unit, through the collective bargaining process, should have the flexibility to agree upon what works best within their communities.  While the Task Force agreed to the concept of a MSB, it could not agree on the powers it would have. A majority of the Task Force members felt that the MSB’s role should be limited to making recommendations and providing technical support. A minority thought the MSB should be able to unilaterally impose changes if the local unit was unable to successfully implement a corrective action plan.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News July 18, 2017

Joseph Krist

Senior Municipal Credit Consultant




Turnpike Revenue Bonds

Moody’s: A2  S&P: A+

The ratings were affirmed for this issue reflecting the facilities essential nature for both the state and the region’s transportation network. The Authority operates the New Jersey Turnpike, a 122-mile, limited-access toll road that serves as part of the Interstate 95 corridor and the Garden State Parkway, a 173-mile, limited-access toll road and essential route for in-state traffic. Both are passenger car dominated roads and the two roads are New Jersey’s largest and most critical surface transportation assets.  The credit reflects the State’s active oversight of its operations which can be a damper on revenues and coverage. Demand has proven to be inelastic in times of both recession and natural disaster.

The Authority does have significant future capital needs so in some periods debt service coverage softens as the political ratemaking process catches up. A five-year executed agreement with the state has limited the credit risk of growing contributions to the state as it sets contributions through 2021 at only $795 million compared to $1.53 billion over the previous five years. Bondholders are entitled to a first lien on net system revenues for the senior lien bonds. The general resolution requires a debt service reserve sized at maximum annual interest. Currently the debt service reserve requirement is 100% cash funded, including the interest on direct placement bonds and if all sureties are included the reserve is greater than current maximum annual debt service; however, two of the surety providers had their credit ratings withdrawn after strong credit distress. The rate covenant in the general resolution requires net revenue to be the greater of the sum of aggregate debt service, maintenance reserve payments, special project reserve payments, and payments to the charges fund, or 1.2 times the sum of aggregate debt service (including net swap payments and unhedged variable rate payments calculated at the maximum rate).





The bonds are secured by a dedication of state sales tax in an amount initially equal to a 1% tax rate. The dedication is made from within the state’s existing sales tax collection and does not represent an increase in the overall state tax rate. The dedicated tax is separate and distinct from the 1% sales tax securing bonds of the New York Local Government Assistance Corp. and a $170 million payment to New York City, which secures sales tax asset receivable corporation bonds outstanding. After all of LGAC’s obligations are paid or discharged, projected on or before 2025, the state sales tax dedicated to the sales tax revenue bonds will increase to a 2% rate of taxation.  The sales tax base providing revenue for the bonds is one of the largest and most diverse in the nation. The segregation provisions requiring the pledged funds to be held by the State Comptroller and the requirement that they be applied to debt service before being used for any other purpose provide excellent insulation from state operating variations.




Moody’s: A2


Moody’s: A1

The ratings are based on strong debt service coverage from pledged federal transportation aid, the long history of the federal aid highway program, and ongoing federal support of transportation infrastructure spending, factors that are offset by a large structural imbalance in the federal Highway Trust Fund (HTF) and authorization risk.

Grant Anticipation Revenue Bonds (GARBs) to an interruption in the flow of federal transportation aid, hence the lower rating. For the reimbursement revenue bonds, this risk is minimized because federal grants that are received continuously through the year are set-aside on a monthly basis in advance of debt service payment dates. The need to account for this risk reflects the entanglement of federal highway funding in increasingly frequent late enactment of a federal budget.


State of New Mexico

Capital Projects General Obligation Bonds

Moody’s: Aa1

The State comes to market in the aftermath of a contentious FY 2018 budget process. Like many resource dependent states, the FY 2017 budget was adversely impacted. The state did take timely action to rebalance the fiscal 2017 budget and bolster reserves in response to lower revenue estimates released in December. The state established of a Rainy Day Fund to capture future growth in oil- and gas-related revenues, which should support budget discipline in periods of increasing revenue.

New Mexico’s general obligation bonds are secured by the full faith and credit of the state and specifically secured by and paid from a statewide unlimited property tax levy. The treasurer is required to keep the property tax proceeds separate from all other funds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature. If at any point there is not a sufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment.

The state’s GO bonds represent only a small portion of its net tax-supported debt . Severance tax backed bonds are the main financing vehicle. Pension funding levels are considered to be about average.



Puerto Rico’s financial control board announced it had “conditionally” certified a restructuring support agreement (RSA) between the island’s Government Development Bank (GDB) and its creditors. On June 30, the commonwealth government formally requested the board for certification of the RSA as a “qualifying modification,” as defined under Title VI of the federal statute. Approval would be the first use of a restructuring under Title VI. The plan would see the issuance of three tranches of bonds to creditors. Haircuts would hover from 25 percent to 45 percent, depending on the tranche, and GDB assets, particularly the municipal loan portfolio and real estate assets, would pay for these new bonds. In general, the higher the exchange ratio between the value of the current claim and the value of the new bonds, the lower the coupon rate.

Tranches A and B will be secured by a first lien on the assets to be transferred from GDB to the Issuer with respect to principal payments and will be entitled to amortizing principal payments from available cash on an equal basis. Tranche C will be secured by a second lien on the assets with respect to principal payments and, unless an event of default occurs, will not be entitled to any principal payments until Tranches A and B bonds are paid in full. Interest will be paid semi-annually on an equal basis on all three tranches to the extent of available cash from collections. Interest will be paid “in kind” if cash on the related semiannual payment date is insufficient.

The board’s press statement says it has “conditionally” certified the RSA but, no details were provided on the conditions to which the agreement’s approval is dependent. To take effect, the deal will need to be approved by a two-thirds vote of bondholders, as long as those voting in favor hold at least half of the bank’s debt.


Many providers of municipal transportation services have looked with trepidation at the upcoming budget process for fiscal 2018. It has been feared that their efforts at developing and maintaining mass transportation projects could be under threat if the Trump administration has its way. Those fears were mitigated a bit when the House Appropriations Committee today released the fiscal year 2018 Transportation, Housing and Urban Development funding bill.

In total, the bill reflects an allocation of $56.5 billion in discretionary spending – $1.1 billion below fiscal year 2017 and $8.6 billion above the administration’s request. The bill includes $17.8 billion in discretionary appropriations for the Department of Transportation for fiscal year 2018. This is $646 million below the fiscal year 2017 enacted level and $1.5 billion above the President’s request. In total budgetary resources, including offsetting collections, the bill provides $76.7 billion to improve and maintain our nation’s transportation infrastructure.

The bill provides $11.75 billion in total budgetary resources for the Federal Transit Administration (FTA) – $662 million below the fiscal year 2017 enacted level and $526 million above the request. Transit formula grants total $9.7 billion – consistent with the authorization level – to help local communities build, maintain, and ensure the safety of their mass transit systems. Within this amount, $1.75 billion is included for Capital Investment Grants, and $1 billion for “Full Funding Grant Agreement” (FFGA) transit projects.

Core capacity projects receive $145 million in the bill, $182 million is included to fund all state and local “Small Starts” projects, and $400 million is included for new projects that provide both public transportation and inner-city passenger rail service. These programs provide competitive grant funding for major transit capital investments – including rapid rail, light rail, bus rapid transit, and commuter rail – that are planned and operated by local communities. Bill language limits the federal match for New Starts projects to 50 percent.

Most public transit providers will be disappointed, as the legislation eliminates National Infrastructure Investment grants (also known as TIGER grants), which were funded at $500 million in fiscal year 2017.


This week we were asked what we thought of the plan to transfer the State’s lottery assets to the State’s pension funds as a way of addressing its huge unfunded liability. We take the view that while it does represent a new asset to the pension fund, it takes its place in a long line of one shot gimmicks that the State has employed to fund pensions over the last two decades. Whether it was the ill fated 1997 pension fund bonding scheme, the bogus agreement in the first Christie term to fund pensions from general revenues which the State failed to adhere to, or this plan all were designed to insulate taxpayers from the consequences of bad pension decisions.

While it is not our place to support one technique over another, it is clear that the State’s credit and ratings will not recover until action’s are taken to fund annually required contributions in full from current revenues. If that requires new revenues, so be it. We acknowledge the political difficulty of raising taxes but the reality is that decisions have consequences and the need for new revenue for pensions is the consequence at hand.

At the same time, policy decisions from the Christie administration in any number of budget areas do not help to improve the environment. In the midst of one of its greatest periods of ongoing crisis, NJ Transit has decided to apply funds meant for much needed capital investment to subsidize operations. This time the transfer for fiscal 2018 will be just over $500 billion. This is not new for the Christie administration. While over $7 billion of such transfers for NJ Transit operations have been made since 1990, an estimated $3.4 billion have been made by the Christie administration.

Viewed in total, it is no surprise that the greatest deterioration in the state’s finances and ratings have occurred in the Christie administration. Investors will be thankful for term limits.

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 July 13, 2017

Joseph Krist

Senior Municipal Credit Consultant



The bankruptcy judge hearing the proceedings in the Puerto Rico bankruptcy cases ordered that all papers opposing the motion to allow PREPA to assume the fuel supply contract with Freepoint Commodities, filed by the electric utility through the Financial Oversight & Management Board for Puerto Rico be filed by July 14 and reply papers to be filed by July 21. On April 10, the utility and Freepoint agreed to amend the contract, extending its termination from October 2017 to October 2018. As part of the agreement, PREPA had to immediately ask the court to authorize the contract if the utility commenced a bankruptcy process under Title III of the Promesa federal law.

According to PREPA, if Judge Swain failed to grant the authorization within 40 days of PREPA’s Title III case commencement, Freepoint could seek to terminate the contract or impose worse payment terms.


We’ve raised the issue of cybersecurity as a potential source of credit weakness especially for services which rely on automation to run their operating and distribution systems. Examples in the municipal space are primarily essential service utilities like electric, water, and wastewater systems. So it is with interest that we note the latest efforts to hack into operating systems at facilities across the country.

Last week the New York Times reported that the FBI and the Department of Homeland Security have been scrambling to help multiple US energy firms and manufacturing plants fight off intrusions from hackers. The most serious incident involves the Wolf Creek nuclear power plant near Burlington, Kansas. The incident raises the profile of concerns of an attack that could not only cause widespread electric outages but potentially disable nuclear safety systems.

The “good” news is that it’s not clear how many of the hackers’ targets have been breached at all or is there any evidence that the attackers managed to access the targets’ actual control system networks. The hackers have targeted facilities from the Wolf Creek nuclear plant to an unnamed supplier of energy industry control systems. In 2014, the Department of Homeland Security warned that hackers had infected the networks of multiple US electric utilities with a piece of general purpose malware known as Black Energy.

Troubling is the initial reaction at the US Department of Energy to queries about hacking efforts against US electric generation and transmission assets. Last month, Secretary Perry would not discuss such efforts in any detail. Now he has reversed that position. Perry recently confirmed that hackers are targeting U.S. nuclear power plants, but he said federal labs can safeguard the nation’s sprawling grid. ” Obviously it’s real, it’s ongoing and we shouldn’t be surprised when you think of the world we live in today.” Perry pointed to “different groups, they may be state-sponsored, they may just be people who are criminal elements involved with trying to penetrate into certain areas.”

The secretary also touted “substantial resources” at the Department of Energy being used to thwart hackers, including the Idaho National Laboratory’s “full-out grid” effort to help detect and protect against attacks. The online assailants hijacked websites likely to be visited by electric utility employees in “watering hole” attacks. They also sent “phishing” emails aimed at luring workers into clicking on booby-trapped documents.

The grid has always been held up as the most likely target of a hack. Nuclear plant controls are designed especially to separate general corporate networks connected to the internet from those which actually control operating elements at those facilities. There is so far no evidence the intruders tried to move beyond corporate computers or cross into any of the isolated operational networks that keep the lights on and regulate the safety of radioactive material. Nonetheless, the issue of cybersecurity continues to grow as a potential source of credit risk and issuers need to do a better job of discussing the issue when they report results or seek to borrow.


Boulder, CO has always been one of the states more progressive cities. So it is no surprise that in an age of increasing privatization, the City is trying to move toward municipal ownership of the City’s electric utility system. Since 2011, the City of Boulder has explored creating its own municipal electric utility (municipalization) as a path to achieving its goals of 100 percent clean energy and an 80 percent reduction in carbon emissions by 2050. During the last week of July and the first week of August, hearings will be held by the Colorado Public Utilities Commission on the City’s application to purchase the system.

The City is asking the Commission to approve the transfer of the assets Boulder wishes to acquire from PSCo so the City may move forward to condemnation; and Boulder’s plan for separating the electric distribution system that serves Boulder into two systems, one eventually owned and operated by Boulder’s new electric utility and one owned and operated by PSCo (the “Separation Plan”). Boulder’s request in Phase 1 also includes several orders that will ensure the Commission’s continued jurisdiction over the assets until PSCo no longer provides retail electric service within the City’s jurisdictional boundaries.

The plan calls for the City to begin operation of the municipal utility in 2022. Boulder’s request includes only the electric distribution facilities and real property interests necessary for the new electric utility to serve its customers located within the City Limits. there are two City-owned properties within the City Limits that the City is proposing that PSCo continue to serve: the facilities at Boulder Reservoir on the northern edge of the City Limits and the Open Space and Mountain Parks Department facilities located at Cherryvale Road and South Boulder Road on the southeastern edge of the City Limits. While Boulder would like to be able to provide electric service to all City-owned properties, the significant cost for the City to provide electric service to those two facilities is not cost effective at this time.

The application at this stage does not provide a price to be paid by the City for any assets transferred from PSCo should the plan move forward. Once that price is determined, the City will have the right to move forward with the plan or to maintain the status quo.


The tolls on the Golden Gate Bridge just rose by 25 cents. Now there is talk in the San Francisco Bay Area of a plan to raise tolls on all the Bay Area bridges by up to $3 as a way of dealing with increasing gridlock on roads and bridges. The Metropolitan Transportation Commission is looking to hike bridge tolls up to $3, a nearly 60-percent increase from current rates. The San Mateo County Transit District and Board of Supervisors are also studying locally-tailored options, such as another half-cent sales tax increase.

Nine counties are being asked to consider the proposed toll hike known as Regional Measure 3, or RM3. The Legislature is currently considering a bill that would enable the nine counties and MTC to float a future ballot initiative to increase tolls up to $3. A Bay Area Council study of 9,000 Bay Area voters found 85 percent said traffic was worse than a year ago and 56 percent would support gradually increasing bridge tolls by $3 over the next four years to help fund improvements.

Roughly three quarters, of 74 percent, said they’d be willing to pay more to cross the Bay Area’s seven state-owned bridges if that money is invested in “big regional projects” that ease traffic and improve mass transit. The Silicon Valley Leadership Group has also floated the prospect of a tri-county one-eighth-cent sales tax that would directly fund Caltrain.

Money from the increased tolls could be used on a wide range of projects, such as expanded ferry service, buying 300 more BART cars to allow the agency to run longer trains, increasing the number of freeway carpool and express lanes, increasing express bus services, extending BART to San Jose and other improvements.

Regional Measure 2, which voters approved in 2004, helped fund the fourth bore of the Caldecott Tunnel; BART’s extension to Warm Springs, Antioch and the Oakland airport connector; light rail in San Francisco; high-occupancy vehicle lanes on Interstate 580 and Interstate 80; improvements to Clipper cards and much more. That was the first time tolls had been raised since 1988, when voters approved Regional Measure 1.

The proposed measure is slated to go before voters in June or November next year. It needs a simple majority across the nine-county Bay Area to be approved.


We have documented the troubles of the energy producing states to deal with the impact of lower oil and natural gas prices on their state revenue streams. That problem was manifest once again with the news that Fitch has lowered Oklahoma’s general obligation bond rating to ‘AA’ from ‘AA+’ . Fitch says that the action “incorporates a decline in financial resilience over the past several years as the state has struggled with the economic and revenue effects of the downturn in energy markets. The state has been unable to address its fiscal challenges with structural and recurring measures and revenue collections continue to reflect subdued energy prices. Although economic and energy production indicators improved in 2017 following an increase in rig counts, revenue growth prospects remain constrained by the extended low price environment and the state has reduced its rainy day fund (RDF; the constitutional reserve fund) to a level that provides limited cushion.

Oklahoma is fortunate that as a low debt issuer among the states its comparative debt metrics help to support a good rating. Nonetheless, the state has had difficulty budget  processes over recent years with balance achieved only through aggressive expense reduction. This has impacted primary services especially education throughout the State.


The ongoing financial deterioration of the City of Hartford have led S&P Global Ratings has lowered its rating on Hartford, Conn.’s general obligation (GO) bonds two notches to ‘BB’ from ‘BBB-‘ and its rating on the Hartford Stadium Authority’s lease revenue bonds to ‘BB-‘ from ‘BB+’. The ratings remain on CreditWatch with negative implications, where they were placed on May 15, 2017. “The downgrade to ‘BB’ reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering bankruptcy,” said S&P Global Ratings.S&P also noted that Hartford has engaged an outside law firm with expertise in financial restructuring. Officials also mentioned that the city would initiate discussions with bondholders for concessions to implement a debt restructuring if it didn’t receive the necessary support in the state’s 2019 biennial budget.

We note that the State’s budget remains unresolved. S&P pegged the odds of a downgrade at one-in-two with a “likelihood of a negative rating action, potentially by multiple notches. Factors that could lead to a downgrade would be if the state passage of a budget is significantly delayed, or if the city were not to receive sufficient support in a timely manner that would enable it to manage liquidity and allow it to meet obligations in a timely manner. Alternatively, if timely budget adoption translates into stabilized liquidity, and provides long-term structural support, we could remove the ratings from CreditWatch.


Nevada saw the legal sale of recreational marijuana begin on July 1. Now as we go to press, Nevada’s governor has endorsed a statement of emergency declared for recreational marijuana regulations, after the state’s tax authority declared that many stores are running out of  product for sale. The Nevada Tax Commission is considering emergency regulations which would allow for liquor wholesalers to distribute marijuana. According to the Commission,  “Based on reports of adult-use marijuana sales already far exceeding the industry’s expectations at the state’s 47 licensed retail marijuana stores, and the reality that many stores are running out of inventory, the Department must address the lack of distributors immediately. Some establishments report the need for delivery within the next several days.”

Liquor wholesalers have undertaken litigation against the Commission which would allow them to participate in the business. Within the first weekend of legal recreational marijuana, sales totaled around $3 million, according to the Nevada Dispensary Association. The tax authority claimed most liquor wholesalers who have applied to distribute marijuana have yet to meet requirements to be licensed. The state is looking for a legal resolution soon in the Nevada Supreme Court. “The business owners in this industry have invested hundreds of millions of dollars to build facilities across the state. They have hired and trained thousands of additional employees to meet the demands of the market. Unless the issue with distributor licensing is resolved quickly, the inability to deliver product to retail stores will result in many of these people losing their jobs and will bring this nascent market to a grinding halt. A halt in this market will lead to a hole in the state’s school budget,” the department said in its statement.

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 July 11, 2017

Joseph Krist

Senior Municipal Credit Consultant






Moody’s: B3  S&P: B  Fitch: B+


Moody’s Investors Service has placed the B3 general obligation (GO) rating of the Chicago Board of Education, IL (CPS) under review for possible downgrade. The action applies to $5.4 billion of rated GO alternate revenue source bonds, and $159 million of GO lease revenue bonds an was prompted by the State of Illinois’ ongoing failure to provide timely operating aid to the district. Delayed categorical grant payments, which were due to CPS in fiscal 2017, total $466.5 million. The state’s timeframe for remitting those payments to the district remains uncertain. The action was taken before the General assembly enacted a budget for FY 2018 for the State. The district’s GO alternate revenue debt, which comprises the vast majority of the district’s outstanding GO debt, incorporates the district’s covered abatement alternate revenue debt structure, in which a levy is automatically extended for debt service if the district does not deposit the alternate revenue (mainly state aid) with the trustee in advance of debt service.




Turnpike Subordinate Revenue Bonds


Moody’s: A3


The Moody’s rating reflects “the Commission’s strong and well-established market position with a history of relatively inelastic demand in response to annual rate increases and a proven willingness to annually raise toll rates at above inflation levels for several years in order to ensure targeted financial metrics are met. The annual rate increases help support annually rising debt levels for both system capital investments and non-system needs under Act 44. The ratings also reflect the turnpike system’s essentiality as a key east-west transportation corridor in the eastern US with a very long operating history and well-managed financial operations with consistently strong senior lien debt service coverage ratios (DSCRs) and a satisfactory liquidity position. The ratings incorporate a degree of expected traffic and revenue (T&R) underperformance over the long-term, albeit not material given increasingly strong traffic and revenue growth over the last couple of years related to low gas prices and economic growth.”





 Moody’s: Aa3

The Port Authority has been at the center of much controversy over a variety of projects in which it is involved. Whether it be traffic issues around the LaGuardia Airport reconstruction, issues regarding the location of and funding for a new Port Authority Bus Terminal, issues regarding the long term future of Kennedy Airport, and general governance issues stemming from efforts by the State of New Jersey to skew the benefits of the regional authority to projects in New Jersey. Fortunately, these issues have not been enough to overwhelm the Authority’s ratings on its flagship Consolidated Bond credit.

The Moody’s rating “benefits from the authority’s monopolistic control over critical transportation infrastructure assets in the economically diverse service area of NewYork/New Jersey including airport facilities and bridges and tunnels between New York City and New Jersey. The rating also reflects the authority’s track record of stable and solid financial performance with Moody’s senior debt service coverage (DSCR) around 2.1 times, Moody’s total DSCR around 1.9 times and debt to operating revenue close to 5.0 times on average from 2011 to 2016, good expenditure control and strong reserve levels.”

Moody’s explains that the rating could be higher but is influenced “by high execution risk associated with the authority’s large 10- year $32.2 billion 2017-2026 capital plan that was approved in February 2017. The capital plan is focused on financing revenue generating transportation assets rather than non-self-supporting development projects, which is positive. However, it includes capital projects of high complexity and substantial size which will require management resources and good control of project costs and risks. In addition, the funding for the capital plan will largely come from cash flow generation, existing liquidity reserves and bond debt financing, putting pressure on liquidity and debt levels in the next few years.”



Moody’s Investors Service has downgraded the rating for Puerto Rico Electric Power Authority’s (PREPA) approximately $8.0 billion in Power Revenue Bonds to Ca from Caa3. The outlook remains negative. According to Moody’s, the downgrade to Ca from Caa3 reflects PREPA’s decision on July 2nd to commence bankruptcy proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the July 3rd payment default on PREPA’s uninsured debt instruments, and the uncertainty regarding a future debt restructuring plan for PREPA, which has greatly increased and will impact the ultimate recoveries for bondholders.

The negative outlook reflects the likelihood that PREPA’s debt restructuring will be delayed given the number of entities filing for protection under PROMESA, which is likely to add more complexity to the process and that litigation, which has already been filed, will persist. Moody’s questions  the ability of PREPA to execute on a sorely needed long-term capital investment program focused on converting oil-based power generation to natural gas, particularly given the challenging economic environment within the Commonwealth.

The original RSA contemplated 85% recovery rates for bondholders. Moody’s estimates that  recoveries for creditors are more likely to fall in the 35-65% range.


The Illini probably hoped that the adoption of a balanced current budget for fiscal 2018 might take some of the pressure from the State’s ratings. In the case of Moody’s, that was not to be. In the midst of the contentious enactment and veto override process, Moody’s put the State’s Baa3 rating on review for downgrade.

We acknowledge that the deal struck was far from perfect and was only mildly bipartisan. Many of the assumptions included in the bill may not be realized but the result cannot be ignored. The budget adoption required hard political choices and overcame a well financed and highly personal effort by the Governor against the plan. The fact that the damage which could be done by a downgrade to below investment grade was acknowledged by the legislature has to be given some weight.

Frankly, we feel that the Moody’s review ignores the State’s political realities. Rarely has there been a governor so intransigent in terms of ideology and wealthy enough to personally undertake an extensive media campaign against such a necessary act of legislation. It will not be a surprise to see the relatively toxic political atmosphere in Illinois extend right on through the November 2018 elections.

One entity which could have hoped for downgrade relief was the City of Chicago. Given that it was reliant on legislative authority from the State to enact tax increases at the local level to partially address its substantial unfunded pension liabilities and that it finally received that authority, the Moody’s announcement of a negative outlook on the City’s rating had to be disappointing. That fact that it was largely based on the ongoing difficulties at the Chicago Public Schools adds to the City’s frustration.

All in all, it was a very unfulfilling week for these credits which probably deserved a little better.


California total revenues of $16.63 billion for June fell short of projections in the governor’s revised budget released two months ago by 2.5 percent. The 2017-18 fiscal year began July 1.  For the fiscal year that ended June 30, total revenues of $121.91 billion missed May Revision estimates by $295.7 million, or 0.2 percent.  The fiscal year total was $2.68 billion lower than anticipated in the 2016-17 budget signed last summer, with all of the “big three” revenue sources missing the mark.

For June, personal income tax (PIT) receipts of $10.94 billion were $161.0 million shy of May estimates, or 1.5 percent.  For the fiscal year, PIT receipts of $82.72 billion were $1.05 billion lower than projections in the FY 2016-17 Budget Act, but lagged May estimates by just $196.3 million, or 0.2 percent.  June corporation tax receipts of $2.42 billion were $344.4 million lower than anticipated in the May Revision, or 12.5 percent.  The fiscal year total of $10.11 billion in corporation taxes was $885.6 million lower than FY 2016-17 Budget Act projections and $283.1 million less than expected in the May Revision.  Retail sales and use tax receipts of $2.32 billion for June were $57.2 million, or 2.5 percent, higher than May estimates.  For FY 2016-17, total sales tax receipts of $24.71 billion missed the original Budget Act projections by $1.03 billion; they topped May Revision assumptions by $126.7 million, or 0.5 percent.

California has not pursued external borrowing since FY 2014-15.  The state ended last fiscal year with unused borrowable resources of $36.98 billion, which was $3.99 billion more than predicted in the governor’s May Revision.  Outstanding loans of $4.84 billion were $1.64 billion lower than the Department of Finance’s May estimates.  This loan balance consists of borrowing from the state’s internal special funds.

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 July 6, 2017

Joseph Krist

Senior Municipal Credit Consultant


This week saw at best an abbreviated new issue calendar due to the extended holiday weekend. In lieu of new issue reviews, we summarize the status of the major state budget issues which were left unresolved when we went to press with our last issue.


The new state budget for the biennium beginning July 1 totals $43.7 billion, a $5.2 billion revenue increase from existing and new taxes, including a hike in the state property tax. It raises spending by 13.5 percent over the state’s present two-year operating budget. That plan adds $7.3 billion to K-12 education over four years. Of that, $1.8 billion is spent in the 2017-19 budget.

The bulk of the new revenue comes from an increase in the state property-tax levy, which raises $1.6 billion through 2019. As that new levy is put in place, local property-tax levies used for school-worker salaries and other needs will be capped at a lower rate. Property owners who qualify for the senior citizen tax-exemption program would not be affected by the property-tax increase.

The greatest impact would be in the greater Seattle area where property values have risen the most. $464 million in new revenue is generated through the expansion of online sales-tax collections, and the elimination of tax breaks on bottled water and extracted fuels, the latter of which benefits oil refineries.


Finally, the legislature agreed on a balanced budget. The $36 billion spending plan would bring in an extra $5 billion in revenue, mostly by raising personal income taxes from 3.75 percent to 4.95 percent. It did not include provisions demanded by the governor – restrictions on the compensation program for injured workers and state-employee pensions [and] a four-year statewide property tax freeze – so the Governor vetoed the bill. The legislature has begun the process of overriding the Governor’s veto. The Senate has already done so and as we go to press, the House is expected to do the same. If enacted, the budget will at least stop the bleeding of the state’s credit rating for the short term.


There is an agreement on how much to spend for fiscal 2018 but there is no agreement on how to fund these expenditures. Closed-door negotiations are ongoing in the Capitol among the Legislature’s political bosses, their top aides and Gov. Tom Wolf’s staff. The legislators are not in Harrisburg. There is a hope that a deal can be reached and votes taken at the end of this week. Tax, bond borrowing, gambling expansion, financial transfers and other bills will have to be passed for a budget to be considered enacted. This method keeps the Commonwealth in operation despite the lack of a completed budget. A prior state Supreme Court decision precludes a governor from not paying state employees who show up to work during a budget impasse. In 2015-16 all state employees were paid, including in the Legislature. It is expected that the results will only address short-term concerns with the major structural issues negatively impacting the commonwealth’s finances left to another day. this bodes poorly for any improvement in Pennsylvania’s long-term credit outlook.


It took a state government shutdown and a now infamous photograph of the Governor lounging on an otherwise closed state beach but, the stalemate between the Governor and the Legislature has been overcome. A compromise was struck on the use of the “surplus” reserves of the state’s non-profit health insurer Horizon Blue cross Blue Shield to balance the state’s budget. In addition, the legislature approved a transfer of the state lottery assets to the state’s pension funds as a way of lowering the unfunded liability of the pension funds. As in the case of other states, the agreement addresses short term problems without fundamentally addressing the State’s long term financial issues.


It is no surprise that Connecticut was unable to enact a budget on time for fiscal 2018. The problems facing the State have been well chronicled as is the fact that from the legislature’s point of view there are no good answers. Fears of corporate departures based on high profile announcements from GE and Aetna have complicated tax policies. Pressures from Connecticut’s many credit challenged localities and weak pension funding situations have complicated the expense side. As always, politics matter as the Governor remains highly unpopular. Were it not for the state’s overall favorable wealth profile, we believe that ratings would be lower as well on a negative track.



Puerto Rico’s financial control board certified with some amendments the commonwealth’s next budget. The board also approved budgets—with certain conditions—for the Government Development Bank (GDB), the Highways & Transportation Authority (HTA), the Electric Power Authority (PREPA), and the Aqueduct & Sewer Authority (PRASA). The list of corrective actions required by the board included additional cuts of $119 million in budget allocations that would cover expenses related to the Legislature, sports, municipalities, payroll and non-profit organizations, among others.

It also asked the government to provide more evidence on how exactly it would implement cuts in government spending that, according to the fiscal plan, must total $440 million during the next fiscal year. Of the estimated amount, the board says that some $200 million still lack implementation plans that demonstrate how the Rosselló administration will hit the target.

In its bankruptcy proceedings, the Puerto Rico government and its Sales Tax Financing Corp. (Cofina) submitted late last week the initial list of creditors to whom they owe money—601,867 businesses and individuals. The commonwealth government delivered the information as part of its bankruptcy proceedings under Promesa’s Title III. Cofina, however, only listed five companies as creditors. These were Ambac Assurance Corp., Assured Guaranty Corp., Bank of New York Mellon, KPMG, Lehman Brothers Holdings Inc. and MBIA Insurance Corp.

So when the advocates for debt restructuring based on significant bond holder haircuts because only evil hedge funds would benefit from meeting debt obligations, keep that number in mind – 601,867.

Over the holiday weekend, the financial control board filed a Title III petition for PREPA in the commonwealth’s federal district court. PREPA’s unsecured creditors includes Scotiabank ($553.2 million), Solus ($146 million), Freepoint Commodities ($60 million), EcoEléctrica ($44.8 million), AES ($44.1 million), JPMorgan ($34.4 million), Puma Energy ($19.9 million), and other claims related to litigation that amount roughly $1.2 billion.

A group of PREPA bondholders stated that before the RSA expired Wednesday, they had offered an extension to the agreement, as well as additional liquidity to fully cover a $450 million debt payment due July 1, in a bid to keep negotiations alive.


S&P Global Ratings has affirmed its ‘AA+’ rating on the State of Minnesota’s general obligation debt, and its ratings on the state’s standing appropriation debt, moral obligation-backed debt, and school program guaranteed debt. At the same time, S&P Global Ratings removed the ratings from CreditWatch, where they had been placed with negative implications on June 15, 2017. The outlook is stable.

S&P placed the state on CreditWatch because of a lack of clarity about how the rental payments and debt service on the state’s $80.1 million certificates of participation series 2014 (Legislative Office Facility Project) would be paid when the governor defunded the legislature’s budget. However, on June 26, the Ramsey County Court issued an order based on an agreement between the Minnesota Legislature and Gov. Dayton. The court ordered continued funding for the House and Senate until Oct. 1, 2017, unless the legal dispute is resolved earlier. The order requires the Senate to make its June 2017 payment for the Senate Office Building, and to continue paying the lease payments during the appeal period. According to the state, the governor and legislature made the proposal in part to insulate the Senate Building lease payments from the legal dispute. The lease rental payments that will be made through the appeal period are more than enough to make the Dec. 1 debt service payment on the state’s certificates of participation, and the court further acknowledged that the Senate is permitted to use its reserve funds to make the lease payments after the order expires.


Maine ended  its government shutdown with the enactment and signing of a fiscal 2018 budget. In Maine, the process featured private negotiations between the Governor and legislative leaders – a practice often derided when practiced in New York. The end of a lodging tax and increased school funding clinched the deal.

Alaska ended its budget impasse when the legislature agreed to a $2.5 billion drawdown of the state’s constitutional budget reserve to balance the budget. That fund will not have enough money left to cover anticipated structural imbalances which will occur for Fiscal 2019.

An intraparty policy dispute has held up enactment of a budget in Rhode Island. Finances are not the issue. Rather the problem is disagreements on items like gun control, minimum wage increases, and labor contract policies. Nonetheless, they are enough to suspend legislative activity and prevent enactment of a budget. State law provides for operations to be funded without a budget so a shutdown is not part of the equation.

Minnesota started 2017 in the enviable position of deciding how to apply an apparent budget surplus. It ended the budget season with major disagreements between the Governor and the legislature which culminated in the Governor “defunding” the Legislature for the upcoming fiscal year. The problem is that this threw the payment of debt service on certain state certificates of participation. The Governor made some additional unhelpful comments regarding his preference for paying salaries over debt service. This put the state’s S&P rating on negative credit watch. Subsequent litigation produced opinions that the debt service should be paid and the credit watch placement has been resolved favorably.

The problems of its New England neighbors have diverted some attention away from the lack of a budget agreement in Massachusetts. The pressure is mitigated somewhat by the fact that in June, the legislature passed and the governor signed an interim budget totaling $5.5 billion, helping keep the state operating through the month of July.

Oregon also entered FY 2018 without a budget but progress was being made. An additional $400 million in anticipated revenue over the next two years based on two positive state revenue forecasts and passage of a plan to raise $550 million from higher taxes on hospitals and a new tax on insurance plans helped to close a budget gap. The health tax will keep intact Medicaid health insurance for hundreds of thousands of needy Oregonians.


The news that National Public Financial Guaranty was getting out of the new insurance business in the wake of its S&P ratings downgrade struck another blow to the municipal bond insurance sector. National’s lack of progress in developing new business reflected the lower value of the product in the aftermath of the financial crisis and the brutal competition in a market that puts a premium on low pricing in an environment of low absolute rates and compressed credit spreads. Outstanding debt insured by National should be fine as the business is effectively operated in a runoff mode. NPFG will still maintain a robust surveillance and information technology infrastructure but has dismantled the new business side of the firm.

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