Muni Credit News April 10, 2017

Joseph Krist

State of California

Moody’s: Aa3  S&P: AA-  Fitch: AA-

California will sell $635,590,000 of General Obligation Bonds this week.

California revenues of $7.63 billion for March beat projections in the governor’s proposed 2017‑18 budget by $1.73 billion, or 29.2 percent, State Controller Betty T. Yee reported.  March revenues were just $56.5 million above estimates in the 2016-17 Budget Act signed last summer. For the first nine months of the 2016-17 fiscal year that began in July, total revenues of $80.91 billion are $607.3 million below last summer’s budget estimates, but $837.1 million ahead of January’s revised fiscal year-to-date predictions.

March personal income tax (PIT) receipts of $3.93 billion topped projections in the governor’s proposed budget by nearly $1.09 billion, or 38.2 percent.  In the current fiscal year, California has collected total PIT receipts of $54.90 billion, or 1.1 percent more than January’s revised estimate. Corporation tax receipts of $1.37 billion for March were 29.1 percent higher than assumptions in the proposed 2017-18 budget.  Fiscal year-to-date corporation tax receipts of $5.19 billion are 9.0 percent above projections in the proposed budget.

March sales tax receipts of almost $2.00 billion exceeded expectations in the governor’s proposed 2017-18 budget by $266.8 million, or 15.4 percent.  For the fiscal year to date, sales tax receipts of $18.29 billion are $346.7 million below the revised estimates released in January—the only one of the “big three” General Fund revenue sources to miss the mark.

SSM Health Care Corporation

Fitch: AA-  S&P: A+

The Corporation will negotiate $500,000,00 of taxable revenue bonds.

SSM comes to market with a negative rating outlook from Fitch. The Negative Rating Outlook reflects SSM’s compressed operating profitability in the second half of 2016, with operating EBITDA margin decreasing to 6.3% at year end from 7.9% during the first half of the year. The bonds are general, unsecured obligations of SSM. Proceeds will be used for the pay down of approximately $200 million of outstanding commercial paper as part of the Corporation’s effort to reduce its interest rate exposure. The remaining proceeds will bolster the Corporation’s liquidity. Ongoing capital spending has resulted in a decline in pro forma liquidity metrics including 159.3 days cash on hand, 19.5x cushion ratio and 108.5 cash to debt at Dec. 31, 2016.

The SSM system consists of  20 owned hospitals, a large multi-specialty physician practice, a managed care organization and a pharmacy benefits management company. It is headquartered in St. Louis, MO, with operations in Missouri, Illinois, Wisconsin and Oklahoma. SSM acquired Saint Louis University Hospital (SLUH) in September 2015. SSM and University of Oklahoma Medicine announced their intent to affiliate in October 2016, but the two entities subsequently announced their mutual decision not to affiliate in March 2017.

Total operating revenue increased 123% from $2.7 billion in fiscal 2009 to $6.1 billion in fiscal 2016. Operating EBITDA margin decreased to 6.3% in fiscal 2016 primarily due to increased labor and supplies expenses. Management is in the process of implementing over $200 million of operating improvement initiatives, including both revenue enhancement and cost management initiatives. Pro forma MADS coverage by EBITDA decreased to 3.5x in fiscal 2016 from 5.3x in fiscal 2015.

Metropolitan Atlanta Rapid Transit Authority (Georgia)

Standard & Poor’s “AA+”  Moody’s Investors Service, Inc. “Aa2”

MARTA will sell $99,165,000 of Sales Tax Revenue Bonds (Third Indenture Series). MARTA’s sales tax revenue bonds are secured by various liens on sales taxes levied in three Georgia counties and the City of Atlanta. The voter-approved sales taxes are collected by the State of Georgia and remitted directly to the trustee for the bonds. MARTA provides mass transit services in the Atlanta metropolitan area. The authority operates 338 rail cars with 38 train stations, and 565 buses operating running on 101 routes. Average weekday ridership is 424,000 trips.

The authority funds its roughly $580 million operating budget (operating and maintenance expenditures plus debt service) primarily from two sources: fare revenues (24% of 2016 O&M plus debt service) and the pledged sales taxes (70% of 2016 O&M plus debt service). Following several years of improving financial operations and sales tax growth, MARTA is in a surplus position. As a result of these surpluses, MARTA’s reserve balance has accumulated to $246 million in 2016.

The liens of the first and second resolution bonds are closed. Those liens benefit from  abundant coverage of debt service by pledged tax revenues which are generated by a growing regional economy.


SUNY Free Tuition Agreement

The 2018 New York State Budget agreement approved last week provides for SUNY and CUNY colleges to be tuition free for qualifying families. The program provides free tuition to families making up to $125,000 per year, and nearly 940,000 New York families are eligible for the program. The new initiative will be phased in over three years, beginning for New Yorkers making up to $100,000 annually in the fall of 2017, increasing to $110,000 in 2018, and reaching $125,000 in 2019.

To qualify, New Yorkers must be enrolled in college full-time, averaging 30 credits per year and completing their degree on-time. The program includes built in flexibility, allowing students to pause and restart the program, due to a hardship, or take fewer credits one semester than another. Students must also maintain a grade point average necessary for the successful completion of their coursework.

The agreement requires those who receive free tuition to live and work in the state for the same number of years that they receive the awards. If they do not, the scholarships would convert to student loans. The requirement may be deferred if recipients leave the state to complete their undergraduate education, to enroll in graduate school or because of “extreme hardship.”

The agreement was not universally praised. Unsurprisingly, opposition was centered primarily in the private college sector. A new grant program will be created for students who attend private colleges in the state, with a maximum award of $3,000. However, private colleges would be required to match the grants, and to freeze tuition for the duration of a student’s grant. The president of the Commission on Independent Colleges and Universities in New York. said she wasn’t sure that many institutions would find the program viable. She said the requirement that colleges freeze tuition for students when they first receive the aid would appear to mean colleges would end up with different tuition rates for students in different classes, and would have to track the students. “This would be bureaucratically difficult,” she said. “Colleges would have to ask if it was worth it.”

The budget also provides an increase in Education Aid of $1.1 billion, bringing the new Education Aid total to $25.8 billion. It also allows ride sharing services to operate in upstate New York. These items, along with changes to the juvenile justice system in the state, were the primary items which had to be worked out in order to facilitate  the agreement to provide for the free tuition program.

NYC Capital Borrowing Takes Shape

The announcement by New York City of a planned issuance of $1 billion of Transitional Financing Authority bonds focuses attention on the City’s ambitious borrowing plans. The Mayor’s Office of Management and Budget (OMB) projects that the city will issue $5.5 billion in new debt in 2017, a 50 percent. increase over the $3.7 billion issued in 2016. New debt issuance is planned to grow in each of the subsequent years peaking in 2020 at $8.7 billion. In previous years, the city assigned state building aid revenue to the TFA, which is authorized to issue Building Aid Revenue Bonds (BARBs) to finance a portion of the city’s school construction needs. Because the TFA is nearing the limit of $9.2 billion in BARBs that can be outstanding, the city will use GO bonds for some projects that would have been financed using BARBs if the limit on outstanding BARB debt had not come into play. From 2013 through 2016, the city issued an average of $775 million in BARBs annually. Over the next four years, however, the city projects it will only issue an average of $248 million a year in BARBs in order to stay under the $9.2 billion cap.

The January plan includes $6.5 billion for debt service costs adjusted for prepayments and defeasances—the use of current surplus funds to prepay future interest and principal on existing debt—in 2017. After adjusting, this is a 7.6 percent increase over the debt service the city paid in 2016. The $6.5 billion in debt service forecast for 2017 in the January plan is 1.3 percent ($85 million) less than forecast in the November 2016 Financial Plan and a total of 3.5 percent ($235 million) less than forecast in the adopted budget released last June. While some debt service savings were recognized in the January financial plan for 2018 and subsequent years, OMB still projects that annual debt service costs (adjusted for prepayments) will rise over the next few years, from $6.5 billion in 2017 to nearly $8.4 billion in 2021. While variable interest rate assumptions for 2017 have been lowered, they still remain at 4.25 percent for tax-exempt debt and 6.0 percent for taxable debt in 2018 through 2021.

Debt service as a percent of tax revenue is projected to total 11.9 percent in 2017, up from 11.3 percent in 2016. Debt service as a share of city-funded expenditures is forecast to total 10.6 percent, slightly higher than 10.2 percent last year. These ratios are both projected to grow through 2021, to 12.8 percent and 11.6 percent, respectively.

Houston Pension Legislation

The Texas Senate State Affairs Committee voted to send the Houston Pension Solution to the full senate for approval.  With one exception, the measure passed out of committee is the same reform package supported by a 16-1 vote of City Council and forwarded to Austin by the City of Houston.

“This is a historic day,” said Houston Mayor Turner.  “With today’s vote, the state affairs committee joins the growing list of supporters for the Houston Pension Solution.   Our plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral.  There is no other plan that achieves these goals and has the same consensus of support.” Mayor Sylvester Turner’s proposal recalculates the city’s pension payments, using lower investment return assumptions and aiming to retire the debt in 30 years, both of which would increase the city’s annual costs. To bring that cost back down, the plan would cut workers’ benefits, and includes a mechanism to cap the city’s future costs even if the market tanks.

The state affairs committee measure includes a provision requiring a vote by the citizens of Houston for the issuance of Pension Obligation Bonds (POBs).  The agreement between the City and the Houston Police Officers Pension System (HPOPS) as well as the Houston Municipal Employees Pension System (HMEPS) includes the issuance of $1 billion in pension bonds to replace existing debt the city already owes HPOPS and HMEPS.  They will not, it is believed under state law result in pension bonds being considered a new borrowing.

“We oppose the inclusion of this provision and will continue to fight for its removal,” said Turner.  “As my father taught me, a deal is a deal.  We have kept our word to the police and municipal employee pension systems.  Now I am asking the Texas Legislature to do the same.” Conservatives contend the only path to true reform would be to move new hires into defined contribution plans similar to 401(k)s, which the bill does not do.

The mayor is again calling on the Houston Firefighter Relief and Retirement Fund (HFRRF) to provide data on the true costs of providing firefighter pension benefits.  He was joined in that call by Texas Senator Joan Huffman who is sponsoring the Houston Pension Solution in the Texas Senate.  Both the mayor and Huffman indicated willingness to revisit the proposed changes in firefighter pension benefits if HFRRF will provide the cost analysis it has, so far, refused to release.  Fire leaders say an ongoing lawsuit prevents them from complying.

Mayor Turner will again testify before the Texas House Committee on Pensions.  The house version of the bill does not include the requirement of a vote for POBs.

San Diego Moves On From The Chargers

San Diego City Council is being asked to consider a special election in November for a hotel-room tax increase measure to fund an expansion of the convention center, homeless services and roads. The increase to the hotel-room tax would be 1 percent for the City of San Diego, another 1 percent for hotels south of state Route 56 and north of state Route 54 and another 1 percent for hotels downtown. That increase would be on top of the city`s 10.5 percent hotel-room tax and the 2 percent tourism marketing levy.

According to the Mayor, the proposed Phase III Contiguous Convention Center Expansion will:  add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet);  allow the Convention Center to retain large conventions – the Center’s top five largest conventions have a regional economic impact of approximately $397 million annually;  allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1.

It is estimated to generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing approximately $15 million annually in additional TOT to the City’s General Fund for critical public benefits and core city services like public safety, parks and libraries;  generate thousands of construction jobs and nearly 7,000 permanent jobs; and provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront.

If the ballot measure (a special tax) is approved by two-thirds of the voters in November of 2017, the TOT increase would be levied and funds would be collected for homelessness, road repair and the Convention Center project beginning in the second half of FY 2018. Based on this preliminary timeline, short term notes would be issued in FY 2019 to begin project work for the Phase III Expansion, and bonds would be issued in FY 2020. Construction is anticipated to begin in July of 2019 and last approximately 44 months.

California Drought Emergency Ends

Good news for California water credits came when Gov. Jerry Brown declared an end to the drought emergency in the State. This will allow water agencies to replenish supplies and be able to see revenues grow through increased usage rather than through higher pricing associated with conservation procedures.

Precipitation in water year 2017 has filled the majority of California’s major reservoirs to above-historic average levels. Likewise, as the USGS streamgage network shows, flows in the majority of the streams have been at or above average for most of the last 4 months. This indicates that most of California’s rivers, creeks, lakes and reservoirs are in good condition. On average, the Sierra Nevada snowpack supplies about 30 percent of California’s water needs as it melts in the spring and summer. A series of back-to-back atmospheric river storms blanketed the Sierra Nevada in January and February 2017. As of April 1, 2017, statewide snow accumulation data indicate that snowpack in the Northern, Central, and Southern Sierra is 164 percent of normal for this date.

Recovery of supplies will be uneven depending upon whether a suppliers water supply is groundwater based. Groundwater aquifers recover much more slowly than surface water and are limited, among other things, by how much and how fast water can recharge. Unlike surface water, which can recover during a few days of heavy precipitation, groundwater aquifer recovery often takes years or decades. Groundwater systems are also relied upon more heavily during times of drought.

In addition, in many areas of the state, groundwater systems have been depleted for long periods – even between droughts – that they have not recovered from. Excessive, long-term groundwater over-use resulting in groundwater depletion can cause subsidence and permanent loss of groundwater storage as well as water quality degradation and seawater intrusion. These long-term impacts on groundwater have not been remedied by the recent weather. If recovery is possible, it will likely take several to many years to accomplish.

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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