Muni Credit News April 19, 2016

Joseph Krist

Municipal Credit Consultant

SEC STEPS UP MUNI FRAUD EFFORT

It will perhaps be of more interest locally in the NY metro area than nationally but the recent actions of the SEC enforcement staff in the municipal bond market should be encouraging to investors. The SEC alleges that Ramapo officials resorted to fraud to hide the strain in the town’s finances caused by the approximately $60 million cost to build a baseball stadium as well as the town’s declining sales and property tax revenues.  It is alleged that they cooked the books of the town’s primary operating fund to falsely depict positive balances between $1.4 million and $4.2 million during a six-year period when the town had actually accumulated balance deficits as high as nearly $14 million.  And because the stadium bonds issued by the Ramapo Local Development Corp. (RLDC) were guaranteed by the town, certain officials also masked an operating revenue shortfall at the RLDC and investors were unaware the town would likely need to subsidize those bond payments and further deplete its general fund.

According to the SEC’s complaint, inflated general fund balances were used in offering materials for 16 municipal bond offerings by Ramapo or the RLDC to investors, who consider the condition of a municipality’s general fund when making investment decisions.  After town supervisor Christopher P. St. Lawrence purposely misled a credit rating agency about the town’s general fund balance before certain bonds were rated, he told other town officials to refinance the short-term debt as fast as possible because “we’re going to all have to be magicians” to realize the purported financial results.

Christopher P. St. Lawrence, who served as RLDC’s president in addition to being town supervisor, masterminded the scheme to artificially inflate the balance of the general fund in financial statements for fiscal years 2009 to 2014. St. Lawrence and Aaron Troodler, a former RLDC executive director and assistant town attorney, concealed from investors that RLDC’s operating revenues were insufficient to cover debt service on bonds to finance the stadium. Troodler helped conceal the fictitious sale and boost the account balance of the town’s general fund by approving RLDC financial statements reflecting a purchase of property that never actually occurred.  Troodler also signed offering documents that contained an additional fabricated receivable totaling $3.66 million for another transfer of land from the town to the RLDC.  The only land transferred from the town to the RLDC during the time of the purported transaction was property donated for the baseball stadium, which St. Lawrence and Troodler knew did not impose any payment obligation on the RLDC.

Town attorney Michael Klein helped conceal outstanding liabilities related to the $3.08 million receivable recorded in the town’s general fund for the sale of a 13.7-acre parcel of land to the RLDC.  But because the title of the property was never transferred from the town to the RLDC, Klein also made misleading statements about the receivable’s source. Troodler helped conceal the fictitious sale and boost the account balance of the town’s general fund by approving RLDC financial statements reflecting a purchase of property that never actually occurred.  Troodler also signed offering documents that contained an additional fabricated receivable totaling $3.66 million for another transfer of land from the town to the RLDC.  The only land transferred from the town to the baseball stadium, which St. Lawrence and Troodler knew did not impose any payment obligation on the RLDC. The town’s deputy finance director Nathan Oberman participated in activities to inflate the town’s general fund by arranging $12.4 million in improper transfers from an ambulance fund to bolster the troubled general fund during a six-year period.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against St. Lawrence and Troodler.

CONNECTICUT BUDGET WOES CONTINUE

Although by various measures, Connecticut is a wealthy state it’s budget is not immune from the pressures of declining revenues and accelerating expenses.   In part because  the state’s legislators are forced to rely heavily on its highest earners to fill the state’s coffers. Nearly 61% of tax revenues is from the income tax. They are  fearful of alienating more of the highest-earning residents after a tax increase last year. Since an initial budget was accepted in February, revenues have

To counter this trend, the Governor released a revised budget for FY 2017 that reflects a 4.89% decline in revenues from the February estimate. It employs layoffs of state employees to reduce expenses by 8.1%. This does result in a small surplus if nothing else changes. Connecticut is in a tough spot as it wealth is highly concentrated and much of it is mobile. On the expense side, flexibility is limited by the need to fund pensions after a long period of underfunding. Spending for those costs account for 5.6% of spending. In addition, debt service eats up a very high 12.8% of expenses.

So the outlook for Connecticut remains negative. This reflects the poor revenue trend and the maintenance of expenditure pressures going forward in an atmosphere of limited management  flexibility.

PUERTO RICO

Puerto Rico Secretary of State Víctor Suárez disclosed that discussions with a group of GDB creditors could involve a request for a forbearance agreement that would cover roughly $120 million of the May 2 payment due from GDB. “If we strike a forbearance agreement, there is still the possibility of declaring a partial moratorium,” said Suárez.  Suárez said it is not currently being contemplated that the creditor group would be asked for additional cash flow lending. He did acknowledge that “the cash flow situation of the government continues to be delicate. The government needs to follow up every week on its cash flow to make the calls with respect to the July 1 payments. It is very hard, very hard that the government can make any payment in July 1.

YOUTH SMOKING TRENDS

It’s the time of year when the states receive their annual payments from the tobacco companies under the Tobacco Settlement Agreement (TSA). As consumption of cigarettes (not other tobacco products) is one of the prime variables impacting the level of these payments  tobacco securitization bonds, annual trends in consumption are closely followed.

The Centers for Disease Control(CDC) and the U.S. Food and Drug Administration’s (FDA) Center for Tobacco Products in its Morbidity and Mortality Weekly Report (MMWR) showed that overall tobacco use by middle and high school students has not changed since 2011. Data from the 2015 National Youth Tobacco Survey show that 4.7 million middle and high school students were current users (at least once in the past 30 days) of a tobacco product in 2015, and more than 2.3 million of those students were current users of two or more tobacco products. Three million middle and high school students were current users of e-cigarettes in 2015, up from 2.46 million in 2014. Sixteen percent of high school and 5.3 percent of middle school students were current users of e-cigarettes in 2015, making e-cigarettes the most commonly used tobacco product among youth for the second consecutive year. During 2011 through 2015, e-cigarette use rose from 1.5 percent to 16.0 percent among high school students and from 0.6 percent to 5.3 percent among middle school students.

From 2011 through 2015, significant decreases in current cigarette smoking occurred among youth, but there was no significant change in the prevalence of current cigarette smoking among this group during 2014 – 2015. In 2015, 9.3 percent of high school students and 2.3 percent of middle school students reported current cigarette use, making cigarettes the second-most-used tobacco product among both middle and high school students. The importance of this particular data trend is that levels of youth smoking have a direct correlation to levels of adult smoking over the long term. Any change in this direction of this trend is noteworthy. This one, should it continue could slow or stabilize the overall decline in cigarette consumption which has negatively impacted levels of available revenues for the repayment of tobacco bonds in recent years.

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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