Muni Credit News February 9, 2017

Joseph Krist










Much of the recent debate about the executive order limiting immigration has revolved around the potential effect on the U.S. economy and businesses. While it is clear that certain industries such as technology and research and development feel vulnerable, there has been less focus on its potential impact on the demand for and economics of U.S. institutions of higher education. This is especially true for public universities.

Over the last several years, states have been reducing their contributions to general state universities as they face increasing budget demands and demands for lower taxes. At the same time, the impact of student debt as an economic drag has increased pressure to slow the rate of tuition growth to in-state residents. One way to do this has been to increase the admittance of foreign students to these institutions.

The “flagship” campuses of state universities lead this trend. Illinois, Indiana, Iowa and University of California campuses in Berkeley and Los Angeles all had at least 10 percent foreign freshmen this academic year, more than twice that of five years ago. The University of Washington’s 2016 freshman class comprised 18% foreign students. Some charge international students additional fees besides tuition: at Purdue University, it was $1,000 this year and will double next year; engineering undergraduates at the University of Illinois at Urbana-Champaign had to pay a $2,500 surcharge this year.

Financially, the logic is compelling. Each seat occupied by a foreign “full fare” student lessens the revenue per seat required from in-state students either in the form of lower tuition or lower general revenue transfers from the respective states. In addition, these students (and relatives) spend what are effectively outside dollars in the local economies in the college towns.

The Institute of International Education, Inc. has assembled estimates of the economic impact from international students. For example, using the institutions referenced above, international economic impact was estimated at: Washington $825.5 million; Illinois $1.57 billion; Iowa $365.8 million; Indiana $956.5 million; California $5.2 billion. This includes tuition and fees, living expenses, and real estate investment by parents of these students (especially from China) who choose to either buy housing for their students or to live here while their students attend U.S. colleges.

For investors, the actual makeup of the student body at a given school should only be of concern as it pertains to the ability of a given institution to maintain a strong financial profile over a sustained period of time. The “moral”, political, and other social issues that arise from these enrollment trends are secondary from a pure investor point of view. That is not to say that they are not something to be monitored. If public low cost universities are not sufficiently available to the children of in-state taxpayers, political support for continued expenditure tax dollars will be further strained. And should stringent immigration limitations become so tight as to greatly limit the admission of international students, then there will be financial implications. But current trends in this area do not seem to be impacting credits supported by these institutions.


The New York State Common Retirement Fund’s (CRF) overall return in the third quarter of state fiscal year 2016-2017 was 1.11 percent for the three-month period ending Dec. 31, 2016, with an estimated value of $186 billion, according to New York State Comptroller Thomas P. DiNapoli. “The state pension fund enjoyed a solid third quarter and, barring a significant downturn, is headed for a successful year. We continue to focus on prudent, long-term management of investments to make sure our assets match our liabilities,” DiNapoli said. “Not long after I became Comptroller, the global financial crisis reduced our pension fund’s value to $108.9 billion. Despite volatility in the markets, my staff and I have rebuilt and strengthened the state pension fund to what it is today – a highly diversified fund with its highest ever estimated value.”

The CRF’s estimated value reflects benefits paid out during the quarter. The CRF ended its first quarter on June 30, 2016 with an overall return of 2 percent for the three-month period and an estimated value of $181 billion. Its second quarter closed on Sept. 30, 2016 with an overall return of 3.51 percent and an estimated value of $184.5 billion, the  investments. The CRF’s audited value was $178.6 billion as of March 31, 2016, which is the end of the state fiscal year. That would translate to an increase of 4.4%. While this is below benchmarks for observes like the Boston College Center for Retirement Research which would use 6% growth as a target, it is better than many major pension funds have achieved.

As of Dec. 31, 2016, the CRF has 38.5 percent of its assets invested in publicly traded domestic equities and 15.6 percent in international public equities. The remaining Fund assets by allocation are invested in cash, bonds and mortgages (26.8 percent), private equity (7.7 percent), real estate (6.8 percent), absolute return strategies (3.2 percent) and opportunistic and real assets (1.4 percent).


We’ve all had to sit endlessly in a doctor’s office or emergency room waiting area  worrying about a diagnosis or outcome wondering if the cure will be worse than the disease. Well now hospital financial managers are getting to have a similar experience courtesy of the new administration. President Trump said in an interview that aired during the Super Bowl pre-game that a replacement health care law was not likely to be ready until either the end of this year or in 2018. “Maybe it’ll take till sometime into next year, but we’re certainly going to be in the process.”

This represents a major shift from promises by both him and Republican leaders to repeal and replace the law as soon as possible.  “It statutorily takes awhile to get,” Mr. Trump said. “We’re going to be putting it in fairly soon, I think that, yes, I would like to say by the end of the year at least the rudiments but we should have something within the year and the following year.” Yes it may even be until 2018 until a replacement is enacted. Mr. Trump acknowledged that replacing the Affordable Care Act is complicated, though he reiterated his confidence that his administration could devise a plan that would work better than the law — despite having provided few details of how such a plan would work.

Asked about Trump’s comments, Sen. John Cornyn (R-Texas), the Senate’s No. 2 Republican emphasized that the initial repeal bill under reconciliation is just the beginning of the process, and that a series of smaller bills will follow.  “We’ve said all along we’re going to start the process using budget reconciliation, but it’s not going to be all in one piece of legislation, they’ll be multiple steps,” Cornyn said. “You’ll have to ask him what he meant, but I think it’s going to take — it’s not going to be instantaneous, because there is going to need to be a transition period.”

Speaker Paul D. Ryan has vowed to move legislation for a replacement for the Affordable Care Act by the end of March. But some Republicans are worried about a political backlash if they repeal the law without an adequate replacement — potentially throwing millions of people off their insurance . One Republican congressman from California had to be escorted out of a town hall meeting on health reform by local police to ensure his safety.

Mr. Trump said that he wanted to present a replacement soon after the Senate confirmed his nominee for secretary of health and human services, Representative Tom Price, Republican of Georgia. The Senate is scheduled to vote on Mr. Price’s confirmation this week. “We’re going to be submitting, as soon as our secretary is approved, almost simultaneously, shortly thereafter, a plan,” Mr. Trump said in January. Senator Lamar Alexander of Tennessee, a Republican who is the chairman of the Senate Committee on Health, Education, Labor and Pensions, recently proposed repairing parts of the health care law ahead of scrapping the whole package.

Congressional Republicans have said they could include elements of a replacement plan in the repeal bill. Yet they note that full replacement cannot pass under the fast-track rules of reconciliation that allow a measure to avoid a filibuster. So far, the only action to repeal the ACA was last month when the president signed an executive order to begin unwinding the Affordable Care Act. It gave the Department of Health and Human Services the authority to ease what it called “unwarranted economic and regulatory burdens” from the existing law.

In the midst of this discussion, a consulting firm said that a Republican proposal to fund Medicaid could save up to $150billion over five years. The analysis from healthcare firm Avalere Health shows that if Medicaid were funded through block grants instead of through the open-ended commitment the program receives now, the federal government would save $150 billion by 2022. Savings from a shift to per capita caps, in which states would receive a set amount of money per beneficiary, would save $110 billion over five years. According to the study, only one state – North Dakota — would see increased funding under the block grant model. Through per capita funding, 26 states and D.C. would see decreases in federal funding while 24 would get an increase.

In the meantime, that isn’t much to go on for hospital managements looking at a June 30 FY end to embark on a serious planning process.


Gov. Tom Wolf proposed a budget for fiscal 2018 in which there are no broad-based tax increases. It purports to set the Commonwealth on a sustainable fiscal course that will grow its rainy day fund from $245,000 today to almost $500 million by 2022. According to the Governor, this budget proposes reforms that, altogether, will save taxpayers more than $2 billion. The plan calls for an additional $125 million for K through 12 classrooms, $75 million to expand high-quality early childhood education, and $8.9 million for our state system of higher education.

The General Fund budget would be $32.3 billion, an increase of 1.8%. Motor license revenues are projected to increase by 3% but only account for $82 million. Tax revenue in the General Fund constitutes more than 97 percent of annual General Fund revenue. Four taxes account for the vast majority of General Fund tax revenue. The Personal Income Tax, the Sales and Use Tax, the Corporate Net Income Tax and the Gross Receipts Tax together provide approximately 86 percent of annual General Fund revenue. For non-tax revenue, the largest sources of revenue are typically from profit transfers from the Pennsylvania Liquor Control Board, licenses and fees, and the escheats or “unclaimed property” program.

For the five fiscal years ending with 2015-16, total General Fund revenue increased by 11.6 percent, an annual rate of increase of approximately 2.8 percent. The rate of growth for revenue during the period has been affected by the recent recovery from the economic recession and the increased economic growth during the post-recessionary period. Without adjusting for tax rate and base changes, the major tax revenue sources experiencing the largest growth during this period were the Realty Transfer Tax, the Personal Income Tax, and the Inheritance Tax. Five-year total increases for these tax types were 64.8 percent, 15.8 percent and 16.2 percent, respectively. Revenue from some tax sources declined or was flat over the period. Receipts from the Gross Receipt and Cigarette taxes decreased over this period. Non-tax revenue sources increased over this five-year period.

The Budget Stabilization Reserve Fund is to receive an annual transfer of 25 percent of the General Fund’s fiscal year ending balance. The transfer requirement is reduced to 10 percent of the General Fund’s ending balance if the balance of the Budget Stabilization Reserve Fund equals or exceeds 6 percent of actual General Fund revenues received for the fiscal year. Appropriations out of the Budget Stabilization Reserve Fund require approval by two-thirds of the members of each house of the General Assembly.

This budget proposes an overall decrease in the commonwealth’s current authorized salaried complement level in 2017-18 of 3,442 positions, from 81,036 to 77,594 positions. Pension and health benefit funding is projected at $6.9 billion, up from $6.7 billion in FY 2017. These expenses are projected to increase annually to $7.5 billion in period.

The projected growth in spending for reserves and employee pension and healthcare costs would be $1.3 billion by FY 2022. This growth assumes favorable economic and investment conditions through the period. The budget will be subject to a high level of risk as the Commonwealth is only a recent participant in Medicaid expansion under the Affordable Care Act. It would likely face significant pressure to cut expenses under either a block grant or per capita aid scenario. This will increase the pressure to address pensions and healthcare benefits for state retirees which have already weakened the Commonwealth’s ratings.

We expect another difficult  and contentious budget approval process like those which have occurred during the first two years of the Wolf administration. We see no respite from the pressure on the Commonwealth’s ratings going forward.


The budget contains a total of $18 billion in General Fund spending. The expense increase is within the state spending cap and is at a pace well below inflation. It makes required increased contributions to the pension systems of more than $357 million in the first year. The Governor states that the plan contains $1.36 billion in new spending reductions. The budget assumes approximately $700 million in state employee labor savings. They would have to be achieved through negotiation.

At more than $5 billion, municipal aid accounts for our single largest state expenditure. And addressing town aid also means addressing educational aid, which amounts to $4.1 billion – or 81 percent – of all municipal funding from the state. The budget changes the educational cost sharing formula, or ECS. For the first time in more than a decade, the formula counts current enrollment. It is intended to stop reimbursing communities for students that they no longer have.

By recognizing shifting demographics in small towns and growing cities, state funding can change with time to reflect changing communities. The new formula also uses a different measure of wealth by using the equalized net grand list as well as a new measure of student poverty. In the proposed budget, Special Education is now a separate formula grant from ECS, and Special Education funding is increased by $10 million. School systems will also be required to seek Medicaid reimbursement where available, ensuring that no community leaves federal dollars on the table.

This year, state government is set to pay $1.2 billion for a system that supports 86,000 active and retired teachers and administrators. The Governor not proposing that teachers’ benefits be limited or cut back. The budget asks the towns and cities – all of them – to contribute one-third of the cost toward their teacher pensions. This would begin to match state pension policies for policemen, or firemen, or other municipal employees. While pressure on local budgets would be raised under this budget, it will create a Municipal Accountability Review Board, chaired by the State Treasurer and the Secretary of OPM.

This will be the most controversial part of the budget process. we would anticipate that there will be great resistance to the concept of localities assuming one-third of the teacher’s pension costs. we would not be surprised to see the entire process crater over this proposal. In combination with the reliance on negotiations to achieve other labor cost savings, we see the budget proposal as being of high risk to the State’s credit. We would expect the existing downward pressure on the ratings to exist, not only for the State, but also for many of its localities.

The Governor knows this and explicitly addressed it in his budget presentation. “My budget leaves $75 million in year one and $85 million the following year in local aid unallocated. This is my way of saying to you – the legislature – that I am ready to negotiate.” Those negotiations will occur and will be quite difficult. In the meantime the pressure on state and local finances will continue.

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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