Muni Credit News February 2, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

DESIGN BUILD FOR NYC

WHY INFRASTRUCTURE IS SO HARD

MUST BE NICE TO HAVE A SURPLUS

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

RAIDERS OF THE LOST STADIUM DEAL

FLORIDA  BUDGET SUBMITTED BY GOVERNOR

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DESIGN BUILD FOR NYC

In his latest budget proposal, Governor Andrew Cuomo granted design-build authority to all state agencies, but that did not include New York City agencies—leaving the city at a disadvantage when it undertakes capital projects. Currently, there are three major projects using the concept in the NYC metropolitan area. They are the Tappan Zee and Goethals Bridge replacements and the LaGuardia airport rebuild project.

Mayor Bill DeBlasio recently sought the support of the influential New York Building Congress in his fight to get Albany to extend so-called “design-build authority”—believed to expedite the construction process while decreasing costs—to New York City instead of just reserving it for state infrastructure projects. The situation results from the City’s home rule status which gives the State approval rights over many city policies.

There has not been significant opposition to the use of design build on the three projects. They have created jobs and that has been enough to tamp down union opposition to changes in funding rules which might be perceived as threatening to job levels. This has always been a central problem in efforts to reform and streamline the execution of major capital projects in the city and state. Adoption of the proposal would be seen as credit positive for the city as it would be a useful tool in reducing some of the City’s risks in capital project delivery and reducing costs and capital requirements through efficiencies.

WHY INFRASTRUCTURE IS SO HARD

In our last issue, we highlighted a list of 50 high priority infrastructure projects – public, private, and P3 – submitted by the nation’s governors in response to a request from the Trump transition team. Among them were two privately sponsored and financed power projects. One would transmit renewable energy from a power generation complex in Wyoming for sale into the California, Arizona, and Nevada power markets. The second project is the generation facility itself – a wind powered complex. The two projects are estimated to produce 4,000 direct jobs and 4,000 indirect jobs reflecting an investment of some $8 billion of private capital. Both projects are fully engineered and 95% permitted. Sounds like a Trumpian dream?

Well one man’s dream is another man’s nightmare apparently. A bill filed in the Wyoming legislature would require utility companies within the state to provide electricity to their customers that comes from “eligible resources.” These would include coal, hydroelectric, natural gas, nuclear, and oil. Electricity from renewable energy sources like rooftop solar or backyard wind projects would also be permitted. The bill would require 95% of all electricity in the state to be derived from “qualified resources” by 2018 and 100% by 2019.

It is billed as a renewable energy law. Any utility company who violates the proposed new renewable energy law would be fined $10 for every megawatt of non-conforming electricity provided to Wyoming residents. Now Wyoming is a large exporter of energy. It is the nation’s largest producer of coal, fourth largest natural gas producer, and eighth among US states in crude oil production. It also one of the consistently windiest states and as such is rated highly as a source of wind power. In fact, several large wind energy installations are in existence in the state or are under construction, but all of their output is scheduled to go to customers in other states. Under the proposed legislation the sale of electricity from wind or solar farms to Wyoming residents would be illegal.

The bill’s principal sponsor bases it on the following: “Wyoming is a great wind state and we produce a lot of wind energy. We also produce a lot of conventional energy, many times our needs. The electricity generated by coal is amongst the least expensive in the country. We want Wyoming residences to benefit from this inexpensive electrical generation. We do not want to be averaged into the other states that require a certain [percentage] of more expensive renewable energy.”

In truth, the effort is one of job preservation in the coal industry. A co-sponsor of the bill says “The controversy of climate change affects our families in Campbell County. Coal = Jobs. The fact of the matter is that man-made climate change is not settled science. Instead, it is hotly disputed by reputable and educated men and women….” Wyoming is also considering taxing in-state wind farms that export electricity to other states. So don’t be surprised if these two projects become casualties rather than candidates under any proposed infrastructure bill.

The situation serves to highlight to complexities which be devil any attempt to undertake a large scale infrastructure program in the current environment. Big plans and projects require big thinking and big thinking clashes with the parochial interests and views of the many constituencies impacted by such a program. This is especially true in areas the likes of which provided the President with his base of support. So try as he might, it might be harder for him to follow through on his goals than he thought since the same people he is trying to please are sometimes his greatest opposition.

MUST BE NICE TO HAVE A SURPLUS

While it is the case in most states that the challenges of sluggish fourth quarter growth and its effect on revenues are the primary concern of state budget makers, Minnesota Gov. Mark Dayton’s final two-year spending plan for the state is an exception. At $45.8 billion, the proposed 2018-19 budget amounts to a 10 percent increase from the current budget of $41.8 billion. The governor has had some clear priorities for his tenure. They include a gas tax to pay for work on roads and bridges, and money to help more students attend prekindergarten programs. His proposal includes a new strategy for stabilizing health care costs: expanding the state’s MinnesotaCare health insurance program to provide a public option for more people.

Additional bigger ticket items include an additional $371 million added to Minnesota’s per-pupil funding formula, which would amount to a 2 percent increase in state spending on each public school student in each of the next two years. Under the proposal, $75 million in new money would be used to expand prekindergarten options in public schools. Dayton said, “It would deliver excellent educations for all our students, support job creation across our state, and create cleaner, healthier futures for all Minnesotans.” After seeking $312 million in rebates for health insurance customers facing premium spikes, Dayton also wants $12 million to expand the MinnesotaCare public insurance program to more people.

About 450,000 Minnesotans would see some kind of tax relief under Dayton’s proposal including farmers, parents paying for child care and charities. The plan calls for $318 million in new money for public colleges and universities, including money for student financial aid, to help homeless students and efforts to reduce campus sexual assault. Not waiting for a federal plan, Dayton renewed his call for a 6.5 percent gas tax increase to finance the rapidly escalating need to repair, replace and expand Minnesota roads, bridges and transit systems.

Much of the spending in the governor’s plan draws from the $1.4 billion surplus expected to be left over at the end of the state’s current fiscal year. That surplus and some control on spending helped Minnesota obtain an upgrade in 2016. The spending blueprint was seen as facing an uphill battle with a GOP-controlled Legislature. Republican lawmakers confirmed that by saying they agreed with many of the governor’s priorities but not with how much he wants to spend.

The debate is a nice one to be able to have and would seem to place the state’s credit in a small group that sees its finances showing positive trends. It also shows that divided state government need not be a basis for stalemate and declining ratings.

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

As part of its compromise budget package, the Illinois Senate has proposed to borrow $7 billion to pay off a large portion of the existing backlog. Senate Bill 4 would raise the total borrowing limit by $7 billion, provide for the bonds to be issued in early FY2018 and calls for level debt service payments over seven years (as opposed to the State’s usual practice of level principal).The proceeds of the sale would be deposited into the General Revenue Fund, but the statute restricts their use to paying off the backlog and instructs the Comptroller and the Treasurer to make payments “as soon as practical.” Implementation of this bill is contingent on passage of the other bills in the Senate package which provide for increased revenue, reforms to workers’ compensation and procurement, a two-year property tax freeze and appropriations to finish FY2017.

The Federation made a few arguments in favor of borrowing. In its view, the first and most compelling is that for a considerable portion of the backlog the state could save on interest cost. It cites the State Prompt Payment Act, which establishes that most bills that are more than 90 days old accrue interest at 1% per month, or more than 12% annually. Bills from healthcare providers accrue 9% after 30 days, as specified by the Illinois Insurance Code. The federation was unable to determine the percentage of bills that bear interest at each rate, and interest is only paid when the bill is finally paid. That made it hard to calculate the actual total interest cost on the bill backlog. It was able to calculate interest payments in past years. Even with a smaller  backlog interest peaked at $318 million in FY2013. Interest payments have been lower in FY2016 and FY2017 only because the lack of a full-year budget has delayed the payment of bills. The Comptroller’s Office estimates that accrued but unpaid interest penalties in FY2017 were in the hundreds of millions of dollars. Even if there is a substantial increase in interest rates, the total borrowing cost of the bonds would still be lower than the 9% to 12% the state currently pays.

The Civic Federation did offer some suggested concepts which it feels should guide any plan for borrowing to pay off the backlog: The borrowing must be paired with a comprehensive, credible plan to balance the budget in FY2018 and match expenditures to revenues for the foreseeable future; the borrowing should be as short as possible in duration to minimize the burden on future fiscal years; the proceeds should be strictly limited to repaying existing, overdue bills; and the State should identify revenues for debt service not otherwise needed to balance the budget.

RAIDERS OF THE LOST STADIUM DEAL

This week’s news that the existing financing plan for a stadium in Las Vegas for the Oakland Raiders to move into had collapsed was not a complete shock. The family of Las Vegas Sands Corp. Chairman and CEO Sheldon Adelson has withdrawn as investors in a proposed $1.9 billion, 65,000-seat domed football stadium. Adelson said he was surprised by the Raiders’ submission of a proposed lease agreement to the Las Vegas Stadium Authority. Raiders representatives told the Stadium Authority board that construction would be financed by Goldman Sachs — with or without the Adelsons as partners.

Under the Southern Nevada Tourism Improvements Act, the Stadium Authority would still have until mid-2018 to attract an NFL team to the planned stadium. If an NFL team is not secured by mid-2018, the Stadium Authority would be dissolved and UNLV officials would be required to deliver notice to the governor of their intent to build a smaller collegiate stadium for the Rebel football team. UNLV officials would have two years to raise $200 million toward the project, and tax revenue generated by the increased hotel tax would be dedicated to that stadium effort instead.

In light of the Adelson’s announcement, Goldman Sachs pulled away from the project Tuesday. Apparently, Goldman’s other relationships with the Adelsons might have been jeopardized if it proceeded on the stadium without them. Goldman has many complicated relationships with NFL teams as one of the leading bankers in the stadium finance sector. They are also banker to the San Diego now Los Angeles Chargers outside of stadium financing.

So where do the Raiders turn to now? They could recruit another big-money Las Vegas investor such as another casino owner, consider a move to San Diego, try to share Levi Stadium in Santa Clara (which Goldman financed for the 49ers), or try to get a new or refurbished home in Oakland. Possible providers of public financing will now have additional leverage and the scenario in Las Vegas which left local politicians feeling hosed to a great extent will not help to generate public support for tax dollars to be used on a facility. An investment group backed by Fortress Investments including former 49ers and Raiders star Ronnie Lott has proposed to build a $1.25 billion, 55,000-seat stadium at the present site.

38 STUDIOS LITIGATION REACHES FINAL SETTLEMENT

The last defendant in a civil suit by the State of Rhode Island, Hilltop (nee First Southwest) Securities has agreed to pay the State $16 million to settle the litigation regarding the State’s issuance of $75 million of debt to finance a failed video game venture founded by former Major League pitcher Curt Schilling. Now that the litigation is settled, Governor Gina Raimondo said: “I am pleased with the proposed settlement of $16 million from First Southwest. But we cannot rest on monetary recovery alone. If the Court approves this settlement, the civil case will end and I will immediately petition the Court for the release of all materials associated with the grand jury investigation of 38 Studios. Rhode Islanders deserve to have access to all of the information that is known. Complete transparency is the best way to ensure that such a disastrous deal never happens again.”

Ever since 38 Studios went bankrupt, the State under its moral obligation pledge has had to make semiannual interest and annual principal payments on the bonds. This latest settlement would bring to $61 million the amount recovered by the state from a string of defendants. The Corporation previously settled claims against Curt Schilling, three codefendants and their insurer for $2.5 million in September 2016; Wells Fargo Securities, LLC and Barclays Capital Inc. for $25.625 million in August 2016; one law firm for $4.4 million in June 2014; and another law firm for $12.5 million in August, 2015.

The transaction and ensuing litigation highlights the risks inherent in the use of public issuers and funds to finance speculative private ventures. The pursuit of jobs and economic development is a legitimate role for public entities but it must be done cautiously and thoughtfully lest the potential financial risk threaten the creditworthiness of the public entities involved.

FLORIDA  BUDGET SUBMITTED BY GOVERNOR

Governor Rick Scott has submitted his proposed fiscal 2018 budget to the Florida legislature. The budget calls for spending of $83.474 billion, an increase of 1.45% above FY 2017 levels. Over 60% of state spending will be for health and education. Billed as the “Fighting for Florida’s Future” budget it proposes to cut taxes by more than $618 million including decreasing the tax on business rents, providing a one-year sales tax exemption on college textbooks, cutting the business tax, exempting school book fairs from the sales tax and implementing a 10-day back-to-school sales tax holiday, nine-day disaster preparedness sales tax holiday, three-day veteran’s sales tax holiday and one-day camping and fishing sales tax holiday.

The plan is represented a producing nearly $21 billion in state and local funding through the Florida Educational Finance Program (FEFP) for Florida’s K-12 public schools which equates to $7,421 per student. This is the highest total funding, state funding and per-student funding for K-12 in Florida’s history. The budget anticipates a 3.3% increase in revenues primarily from increased sales tax revenues. The General Fund relies upon sales taxes for just under 80% of its projected revenues.

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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