Muni Credit News April 23, 2015

Joseph Krist
Municipal Credit Consultant


This is the time of year when tobacco securitization investors refocus attention on sales figures and funds available for distribution at mid-month under the terms of the Master Settlement Agreement. As the states and their subdivisions calculate exactly how much is available to them from the April distribution, other data becomes available regarding smoking trends which are central to the analysis of these bonds.

The most recent Morbidity and Mortality Weekly Report (MMWR) from the Centers for Disease Control and Prevention and the U.S. Food and Drug Administration’s Center for Tobacco Products (CTP) showed that Current e-cigarette use among middle and high school students tripled from 2013 to 2014, according to the data. Findings from the 2014 National Youth Tobacco Survey show that current e-cigarette use (use on at least 1 day in the past 30 days) among high school students rose from 4.5 percent in 2013 to 13.4 percent in 2014, or from approximately 660,000 to 2 million students. Among middle school students, current e-cigarette use more than tripled from 1.1 percent in 2013 to 3.9 percent in 2014—a rise from approximately 120,000 to 450,000 students.

This is the first instance since the survey started collecting data on e-cigarettes in 2011 that current e-cigarette use has surpassed current use of every other tobacco product overall, including conventional cigarettes. Hookah smoking roughly doubled for middle and high school students, while cigarette use declined among high school students and remained unchanged for middle school students. Among high school students, current hookah use rose from 5.2 percent in 2013 (about 770,000 students) to 9.4 percent in 2014 (about 1.3 million students). Among middle school students, current hookah use rose from 1.1 percent in 2013 (120,000 students) to 2.5 percent in 2014 (280,000 students).
There was no decline in overall tobacco use between 2011 and 2014. Overall rates of any tobacco product use were 24.6 percent for high school students and 7.7 percent for middle school students in 2014.

What is problematic for investors is that In 2014, the products most commonly used by high school students were e-cigarettes (13.4 percent), hookah (9.4 percent), cigarettes (9.2 percent), cigars (8.2 percent), smokeless tobacco (5.5 percent), snus (1.9 percent) and pipes (1.5 percent). The products most commonly used by middle school students were e-cigarettes (3.9 percent), hookah (2.5 percent), cigarettes (2.5 percent), cigars (1.9 percent), smokeless tobacco (1.6 percent), and pipes (0.6 percent).

The results are problematic as MSA revenues are based on sales of actual cigarettes or “sticks” rather than sales of all tobacco products such as roll-your-own tobacco and smokeless tobacco e-cigarettes, hookahs and some or all cigars. Should this trend continue, expected rates of cigarette shipment declines should be anticipated with negative impacts on securitization cash flows.


A new forecast issued Monday projects that the state will collect $187 million less in taxes through June 2016 than anticipated. This may force Gov. Sam Brownback and the Legislature to consider larger tax increases than they had expected to balance the state budget. Before the new forecast, they had been working on budget proposals requiring about $150 million a year in tax increases. Revising a forecast made in November, state officials and university economists reduced the estimate for total tax collections for the current fiscal year by nearly $88 million, to about $5.7 billion. They also cut the tax collection estimate for the fiscal year beginning in July by nearly $100 million.


OFG Bancorp announced that its Oriental Bank subsidiary (“Oriental”) will place its $200 million participation in a fuel purchase line of credit with the Puerto Rico Electric Power Authority (PREPA) on non-accrual status and will take a $24.0 million provision. The move reflects Oriental’s view that PREPA, despite its oil price related increasing ability to meet contractual obligations with creditors, has signaled an unwillingness do so.

Oriental, said, “Our credit analysis, based principally on data provided by PREPA and its advisors, shows the utility has the financial capability to pay its creditors. However, in the recent negotiation for extending the more than 8-month forbearance period previously granted by its creditors, PREPA clearly demonstrated a reluctance to commit to do so, despite the utility’s improved cash flows.”

Oriental’s $200 million PREPA exposure was acquired through the late 2012 purchase of BBVA’s Puerto Rico operations, and is part of a syndicated $550 million fuel purchase line of credit.


Moody’s downgraded New Jersey’s general obligation bonds to A2 from A1. The outlook is negative. Ratings on the state’s appropriation-backed, other GO-related debt, and intercept programs were also lowered one notch. The downgrade to A2 was driven by the continuation of the state’s weak financial position and large structural imbalance, reflecting continued pension contribution shortfalls. Liquidity and structural balance are projected to remain very weak through fiscal 2016 – a longer period than contemplated. While some stabilization in budget performance, economy, and liquidity was noted, Moody’s is concerned that beyond fiscal 2016, the state’s plan to restore long-term structural balance relies on economic growth and further pension reforms, which have uncertain timing and impact.

The negative outlook reflects anticipated further decline in the state’s financial and pension position before pension reform, if successful, is implemented. Without meaningful structural changes to the state’s budget, such as pension reform that dramatically improves pension affordability, the state’s structural imbalance will continue to grow, and the state’s rating will continue to fall.


The City of Atlantic City was granted a 60-day extension on a $40 million state loan that was due on March 31. The extension comes as a lawsuit was filed by the Borgata Hotel Casino that could challenge future bond sales. The city’s emergency manager Kevin Lavin released a report on March 24 recommending cutting expenses by $10 million this year as well as negotiating with key stakeholders to help create “fiscal stability.” Atlantic City is facing a projected $101 million budget gap in 2015.

Recent economic news includes a grand-opening for a new 85,450-square-foot Bass Pro Shops Outpost store with 200 employees on April 15. A new 16,000-square-foot development from BET Investments featuring upscale stores is also scheduled to open this year next to the Boardwalk Hall sports arena. One day after Polo North, a Wellington, Fla.-based developer received court approval to buy the Revel casino for $82 million, Polo North Inc. and Stockton University in Galloway Township, N.J. announced plans on April 3 to invest more than $500 million in the city.

Stockton, a public college, is slated to open its new Island Campus at the former Showboat Casino Hotel site in Atlantic City this fall. Polo North deposited $26 million in escrow for Stockton, which covers the $18 million purchase price the university paid for the former casino property as well as other costs incurred such as maintenance, utilities, employees and insurance.

Stockton has an 18-month first right to purchase or lease the property for educational purposes. A contingency in the deal allows the university a 90-day period to terminate the contract as it evaluates potential legal challenges from the neighboring Trump Taj Mahal, which has tried to block the bid because it doesn’t want college students living next to its casino.


A California state appeals court on Monday ruled that a tiered water rate structure used by the city of San Juan Capistrano to encourage conservation was unconstitutional. The Orange County city used a rate structure that charged customers who used small amounts of water a lower rate than customers who used larger amounts.

The 4th District Court of Appeal struck down San Juan Capistrano’s fee plan, saying it violated voter-approved Proposition 218, which prohibits government agencies from charging more for a service than it costs to provide it. “We do hold that above-cost-of-service pricing for tiers of water service is not allowed by Proposition 218 and in this case, [the city] did not carry its burden of proving its higher tiers reflected its costs of service,” the court said in its ruling.

The court opinion means that tiered prices are legal as long as the government agency can show that each rate is tied to the cost of providing the water. A group of San Juan Capistrano residents sued that city, alleging that its tiered rate structure resulted in arbitrarily high fees. The city’s 2010 rate schedule charged customers $2.47 per unit — 748 gallons — of water in the first tier and up to $9.05 per unit in the fourth. The city, which has since changed its rate structure, was charging customers who used the most water more than the actual cost to deliver it, plaintiffs said. The law, they argued, prohibits suppliers from charging more than it costs to deliver water.

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