Muni Credit News September 22, 2016

Joseph Krist

Municipal Credit Consultant


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On September 15, a state appeals court ruled on an appeal in the ongoing Korshak litigation which deals with OPEB benefits for city employees after 2013. We discussed that ruling in our July 18, 2016 issue. A three judge panel unanimously agreed that the trial court erred by striking defendants’ motion to enforce a settlement agreement. The settlement was modified and the court had jurisdiction to enforce the modification. The City agreed to provide benefits to its retirees for the entire 2013 plan year and its assumed obligation imposed a duty to reconcile and to pay the amount it agreed to pay under the settlement agreement.

The trial court found that, because the agreement by its own terms expired in June 2013 and because the City’s actions did not constitute a modification of the original settlement agreement, it lacked jurisdiction. The appeals court  reversed that ruling and remanded the case to the circuit court with directions that it enter an order in favor of the retirees.

The appeals court found that the retirees’ theory is that they are not asking the court to modify or amend the agreement. Instead, the retirees maintain that the City itself extended the agreement and they are seeking to enforce the City’s modified obligation. The Court referenced numerous City documents in its decision. The City maintains that whatever it agreed to do and whatever obligations it took on, there was never an extension of the settlement agreement beyond June 30, 2013. The City’s letter explains that “Under the Korshak (April 2003) Settlement Agreement, the City of Chicago agreed to provide support for annuitants through June 30, 2013″and establish a commission to make recommendations for the plan going forward. “The City will extend current coverage and benefit levels through December 31, 2013. This additional time will allow retirees to maintain coverage for a full plan year, recognizing what we heard from many retirees who have planned deductible and out of pocket expenditures based on an expectation of full year coverage. The City will, however, adjust the benefit levels provided under the current plan starting January 1, 2014. After January 1, 2014, the City will provide a healthcare plan with continued contribution from the City of up to 55% of the cost for that plan for their lifetimes to the City retirees who are members of the Korshak (subclass) . . . For all annuitants who retired on or after August 23, 1989, in light of the evolving landscape of national healthcare and challenges faced by Chicago taxpayers, the City will need to make changes to the current retiree healthcare plan.

“The letter from the City commits it to continue to provide coverage at the same levels as under the April 2003 agreement for the rest of the plan year. The City, however, argues that its “voluntary extension of benefits” did not “constitute an extension of the 2003 settlement agreement.” The City’s letter expressly invokes the settlement agreement and commits the City to “extend current coverage and benefit levels through December 31, 2013,” giving retirees “additional time” so that they “maintain coverage for a full plan year.”

The City suggests that it never said it would extend the agreement, only that it would extend the benefit levels. But that overexacting reading fails to give the commitment expressed in the letter a reasonable interpretation in light of the words used and their context. Moreover, the reading the City would have us ascribe to the letter ignores the nature and realities of the parties’ relationship, failing to account for what both parties understood the commitment to mean along with what actually transpired.

In its letter, in light of the commission’s suggestions, the City committed itself to “extend current coverage and benefit levels.” Those are the essential terms of the settlement agreement being “extended.” The reason for the extension was to give retirees “additional time” allowing them to “maintain coverage for a full plan year.” The full “plan year” went to December 31, 2013, suggesting an unbroken continuation of the status quo. Not what the City proffers—some separate conferral of benefits—but maintaining what was in place until the end of the plan year.

The letter then explains that the City would “adjust the benefit levels provided under the current plan starting January 1, 2014.” The letter also states that, beginning in 2014, “in light of the evolving landscape of national healthcare and challenges faced by Chicago taxpayers, the City will need to make changes to the current retiree healthcare plan.” If the then-current plan ceased in June 2013, why would the City repeatedly state that it would start to make changes to that plan in 2014. The only reasonable interpretation is that it remained the operative plan.”

The initial amount at stake is $50 million covering the last six months of 2013. More importantly, the Court indicated in its decision that any changes going forward needed to be negotiated. This leaves the City in a more difficult position. For us it is an indication that any ratings moves based on the City’s pension outlook be made slowly and cautiously.


The political pressures are off to an early start as the fiscal oversight board in Puerto Rico begins its work. One example of why many investors are skeptical about the willingness of the body politic to do what is necessary is the current debate about the board’s powers as they pertain to government employment. Recently, Senate President Eduardo Bhatia of the pro-Commonwealth Popular Democratic Party said that Promesa “does not establish anywhere” that government employees hired after May 4 or those who obtained their permanent status after that date, could be let go, as stated previously by the pro- statehood New Progressive Party (NPP) president and gubernatorial candidate Ricardo Rosselló.

No one argues that 4,117 permanent positions were granted after May 4 as the government was planning its July bond default. The minds of investors cannot be faulted for reeling at the idea of hiring for example, additional teachers for a school system that is steadily losing students during a time of obvious financial crisis. In the meantime, Richard Ravitch,  the representative at the federally appointed board, of which the governor is a nonvoting member offered a number of unsettling thoughts.

He predicted that the García Padilla administration’s long-term  fiscal plan would include a “majorly worse” fiscal outlook. He said after meeting four members of the board that they could face a “steep learning curve.” He recommended fixes for Puerto Rico he thinks the U.S. Treasury missed, he mentioned Act 154—the 4% excise tax on certain multinationals doing business on the island, currently set to phase out in 2017. It accounts for almost one-fourth, or $2 billion, of the island’s annual tax revenue.

It is generally thought that the board’s chairman is expected to be named, as required by the federal law. Then the long slog to recovery can hopefully begin. That effort will not be aided by the most recent news from Puerto Rico’s Institute of Statistics that 64,000 Puerto Ricans left last year, matching the highest number reported in the past 11 years. The vast majority of Puerto Ricans are settling in the U.S. mainland.

In the meantime, Rafael Hernández Montanez, a leading legislator has called for the resignation of one of the board members. Montanez was one of the legislators who initially backed tax increases in April of this year but then reversed himself in a move that helped to hasten a default. This is exactly the kind of political grandstanding that will impede efforts to resolve the financial crisis.


The Land of Enchantment may not have a large amount of general obligation debt outstanding ($327 million) but it is rated Aaa by Moody’s. That may not be true much longer as Moody’s has placed the rating under review. The state recently released August revenue estimates which show an extremely large reduction in estimated General Fund revenues for both fiscal 2016 and fiscal 2017, compared to its prior forecast prepared in January. The fiscal 2016 revenue estimate was reduced by $348 million, resulting in a significant drawdown of total General Fund reserves to $130 million or 2.3% of recurring revenues. The fiscal 2017 revenue estimate was reduced by $556 million, throwing the budget into structural imbalance. Absent any legislative action, the August estimates would result in an ending reserve deficit for 2017 of $326 million or -5.7% of recurring revenues. The legislature will convene in special session this month to address the shortfalls. If they do not, the rating could be impacted.

New Mexico’s GO bonds are paid from a dedicated statewide property tax levy without  without limit as to rate; the treasurer is required to keep tax proceeds separate from all other funds; and the state’s practice is to levy the tax in advance so that debt service is pre-funded. The state’s more widely issued severance tax backed bonds were downgraded in May of this year. That downgrade was primarily attributable to the sharp reduction in coverage for the senior and subordinate lien bonds resulting from the decline in oil and gas prices and the expectation that coverage will not return to prior levels in the near term. The ratings also reflect the inherent volatility of the pledged revenue stream, which consists primarily of taxes on the production of natural gas and oil in the state.

New Mexico is the 36th-largest state by population, at 2.1 million. Its state gross domestic product, $92.2 billion, is the 37th-largest. The state’s wealth levels are below average, with per capita personal income equal to 81.5% of the US level and a poverty rate among the highest for US states.


In our most recent issue, we discussed the issue of market vs. actuarial valuations for calculating pension liability requirements for California’s units of local government. One of those cities is San Bernardino which recently concluded four years of operations under Chapter 9. The City has started, what it hopes to be, the final step on the path to exit bankruptcy. A hearing to consider confirmation of “Third Amended Plan for the Adjustment of Debts of the City of San Bernardino” is set for 10 a.m. on Friday, October 14, 2016. Implementation is complete or underway on all actions targeted for 2015 under that Plan. In addition, implementation of several elements targeted for 2016 are already underway.

If finally approved, the City will have reached agreements to adjust general obligation debt, unsecured pension debt (the City has reached agreement with creditor. Obligation reduced from $95.8 million to $50.7 million. Annual payments reduced from $3.3 to $4.7M per year to $1.0 to $2.5M per year.), and achieved an estimated total of $60 million in cost savings related to employee healthcare. A new draft charter is under development and has been reviewed at public meetings. The Charter Committee provided recommendations to Council in May and anticipates a November 2016 election.


The Arkansas Highway and Transportation Department is commissioning a study on the feasibility of not only using tolls to help build a new section of Interstate 49 in western Arkansas, but also to have a private entity operate and maintain the tollway. The Arkansas Highway Commission last week approved an order to solicit consultants to study using tolls and a public-private partnership to complete a 13-mile section of I-49 from Interstate 40, where I-49 ends now, south to Arkansas 22 in Barling. It would be the first public-private partnership on a roadway project in Arkansas, state highway officials said.

The department director stated  “The thought, if the money part works out, is that a private entity would design, build, operate and maintain what would actually be a design-build-finance-operate-maintain project. Part of the study should also evaluate the costs and benefits of operations and maintenance by a third party versus operations and maintenance by the department.”

The move would be a logical next step in the Department’s use of the private sector. Currently, the department is using a more limited design-build method on its Interstate 30 corridor project, a series of improvements through downtown Little Rock and North Little Rock, including replacing the I-30 bridge over the Arkansas River. Longer term, a likely candidate for a toll financed P3 would be the previously discussed  I-49, which is a north-south corridor between Kansas City, Mo., and Shreveport, La. More than $1.2 billion has been spent on improvements in the Arkansas stretch of the highway that is 99 percent complete from I-40 to Canada. The environmental impact statement for the project is outdated as the Federal Highway Administration approved it in 1997.

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

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