Muni Credit News April 4, 2017

Joseph Krist

Municipal Credit Consultant

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THE HEADLINES…

HOUSTON PENSION LEGISLATION

WEST VIRGINIA PARKWAYS

BRIGHTLINER CONTINUES TO EVOLVE

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

JEA COMES FULL CIRCLE

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HOUSTON PENSION LEGISLATION

After hearing testimony from Mayor Sylvester Turner among many others last week, 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 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.

WEST VIRGINIA PARKWAYS

West Virginia has taken one of the legislative steps needed to help to implement its own infrastructure expansion as articulated by its Governor earlier this year. A bill giving give the West Virginia Parkways Authority new financing  abilities is moving to the House after it passed the Senate. Senate Bill 482 would give the agency the authority to study, investigate, evaluate and, if feasible, develop a single fee program and impose a flat fee in connection with motor vehicle registration and renewal by the Department of Motor Vehicles.

The bill allows the authority to establish a program where drivers would pay a flat fee to travel the authority’s roads rather than pay individual toll fees. It also authorizes the agency to have reciprocal tolling with other states and would allow it issue revenue bonds. To aid the process, another provision of the bill would allow people to get an EZPass from the DMV instead of only from Parkways.

The bill creates and designs a special revenue account within the State Road Fund known as the State Road Construction Account and would expand the authority of the Parkways Authority to issue revenue bonds or refunding revenue bonds for parkways’ projects and for the West Virginia . It would define a  “Parkway project” as any expressway, turnpike, bridge, tunnel, trunkline, feeder road, state local service road or park and forest road, or any portion or portions of any expressway, turnpike, trunkline, feeder road, state local service road or park and forest road, whether contiguous or noncontiguous to the West Virginia Turnpike which the Parkways Authority or the Department of Transportation may acquire, construct, reconstruct, maintain, operate, improve, repair or finance . It specifically provides for the Authority to issue parkway revenue bonds of the State of West Virginia, payable solely from toll revenues, for the purpose of paying all or any part of the cost of any one or more parkway projects.

BRIGHTLINER CONTINUES TO EVOLVE

For a project that has not been able to access the municipal bond market, we admit that we have spent a lot of time on it. It remains of interest as one of the more interesting transportation stories we have seen in some time. The latest turn in the saga was the announcement that Grupo Mexico Transportes — which owns Mexico’s largest railroad network and rail in Texas — is to acquire 100 percent of Florida East Coast Railway’s shares and assume its debt, pending approval of the deal by regulatory authorities. All Aboard Florida has based its business model on using the existing Florida East Coast Railway tracks. The company has said that taking advantage of existing infrastructure — All Aboard is improving existing track between Miami and Cocoa and building new track between Cocoa and Orlando — will help make the $3.1 billion railroad profitable.

Fortress — parent company of both Brightline and Florida East Coast Railway — was itself purchased in February by Japanese conglomerate SoftBank. Brightline contends it will be unaffected by the sale, that Brightline is a “separate company” that has “the right to operate passenger service,”. “We have all shared operations-related agreements in place with the Florida East Coast Railway for us to fully build out and implement our passenger rail system.”

At the same time, a controversial proposal intended to slow the planned Brightline service might have been derailed in the Florida House. The Transportation & Infrastructure Subcommittee on Tuesday declined to hear the proposal (HB 269), which in part sought to give the Florida Department of Transportation oversight of issues not preempted by federal law. The measure also sought to require private passenger-rail operations to cover the costs of installing and maintaining safety technology at crossings unless contracts are reached with local governments.

It was seen as aiding the efforts of Martin and Indian Counties in opposition to the project. Among key requirements of the Florida High Speed Passenger Rail Safety bill, were ones to build fencing around Brightline’s tracks.

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

Earlier this year we discussed the appointment of Seema Verma as Administrator for Centers for Medicare & Medicaid Services. At the time we highlighted her background as an advocate for reducing Medicaid spending especially during her tenure in Indiana under governor Mike Pence. It did not take long for Ms. Verma to place her stamp on Medicaid funding practices. On March 30, the Centers for Medicare & Medicaid Services (CMS), issued a  final rule addressing the hospital-specific limitation on Medicaid disproportionate share hospital (DSH) payments under section 1923(g)(1)(A) of the Social Security Act (Act. It clarified that the hospital-specific DSH limit is based only on uncompensated care costs. Specifically, this rule makes explicit in the text of the regulation, an existing interpretation that uncompensated care costs include only those costs for Medicaid eligible individuals that remain after accounting for payments made to hospitals by or on behalf of Medicaid eligible individuals, including Medicare and other third party payments that compensate the hospitals for care furnished to such individuals.

As a result, the hospital specific limit calculation will reflect only the costs for Medicaid eligible individuals for which the hospital has not received payment from any source. These regulations are effective on June 2, 2017. Hospitals had previously been able to claim reimbursement of full costs of Medicaid patient services even if a portion of those costs had been payable by private insurance which those patients might have had. One can qualify for Medicaid and still have some level of private insurance.

Many commenters suggested that the regulation will impose a great burden on all involved, which outweighs any incremental benefit in transparency and accountability, and diverts scarce financial and human resources away from providing and paying for care to beneficiaries. The CMS position is that this policy ensures that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients. Either way it represents a decline in the amount of revenues available to hospitals which provide significant levels of services to Medicaid populations.

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

When most people think of the EPA they think in terms of big concepts and big projects. Scrubbers on large power generators, huge wastewater and water treatment projects in support of large metropolitan service areas, air and water quality standards. They tend not to think of the many smaller components that comprise the effort to achieve clean air, water, and waste disposal practices. But it is at this micro level, that the greatest impact of the proposed reductions to the EPA budget on tap from the Trump administration might be to projects in medium to small size communities.

EPA funding often provides the financing catalyst for expansions or upgrades to small town water systems through replacement or expansion of piping for water delivery. EPA funding supports upgrades or retrofits of local treatment facilities. It stimulate spending for rural water reclamation projects which support agriculture reducing competition for new water supplies. EPA’s diesel emissions reduction program has covered costs for replacement or retrofitting of school buses. These programs usually benefit rural areas where lower property values impact local revenue raising activities. What local rural school district would want to bear the costs of more efficient school bus systems solely out of their own budgets?

In those areas where the manufacturing industry has passed them by where old plant sites need help to remediate the impacts of mining, metal, and chemical production, EPA brownfield programs help recovering communities. These programs provide funding and expertise to small communities looking to repurpose old industrial sites in support of new local economic development efforts.

At least in the areas of water and wastewater project finance, state revolving funds are an established source of lower cost funding for smaller municipalities. These funds will be forced to fill in more and more of the gap, as regardless of politics, water and wastewater infrastructure has come to be a necessity in the toolkit of smaller town and rural economic development.

JEA COMES FULL CIRCLE

JEA is a municipal utility based in Jacksonville, Florida, and its service territory covers Jacksonville, and parts of three adjacent counties. In the late 1970’s, the utility came under pressure due to its reliance on oil as its primary fuel used at its electric generating plants. The rises in prices and interruptions in supplies that were characteristic of the time led the Authority to embark on an effort to replace oil with more economic and stable sources of fuel for a new generation of plants using coal. The result was the construction of the St. Johns River Power Park (SJRPP), a 1,252-megawatt, coal fired electric plant jointly owned by JEA (80%) and FPL (20%).

On 17 March, JEA (Aa2 stable) announced that it had reached an agreement with Florida Power & Light Company (FPL, A1 stable) to decommission the 30-year old SJRPP . The decision reflects the changing economic and environmental realities facing large users of coal as a generating fuel. The decision is seen as credit positive because it is likely to produce material net cost savings for JEA to adequately address any remaining debt associated with SJRPP. Additionally, the agreement mitigates the potential for future costs to comply with environmental regulations relating to carbon emitting resources and helps keep customers’ rates stable and competitive versus peers in Florida.

Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

Subject to JEA and FPL signing definitive agreements and obtaining requisite regulatory approvals relating to plant closure, decommissioning SJRPP would commence in early 2018 and FPL would pay JEA for the costs to terminate the power purchase agreement, including employee-related expenses. In addition, FPL would share proportionately in shutdown costs and environmental remediation. As of fiscal 2016 (which ended 30 September 2016), there was approximately $494 million of long-term debt associated with the SJRPP assets, split between $210 million of Issue Two debt under the first bond resolution. Terms of the agreement between JEA and FPL appear to enable the utilizing of available funds in the debt service reserve fund for the Issue Two debt together with additional cash payments to be provided by both utilities to defease the full amount of the Issue Two debt at closing (principal amount expected to be $128 million).

Cash flow erosion associated with continuing to pay debt service on the estimated $281 million of Issue Three debt that will remain outstanding with no hard assets will be addressed through annual operations and maintenance, fuel and other cost savings. We project those savings will more than offset the $24 million of annual debt service requirements, including amortization, on the Issue Three debt, which has a final maturity of 2039. Moody’s is on record as projecting that JEA will maintain its debt service coverage metrics in line with historic levels of 2.0x or better for its electric system, without needing a further increase to its base rate beyond the 4.4% increase that became effective on 1 December 2016.

SJRPP’s capacity factors have steadily declined since 2014 owing to low natural gas prices. Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

In the end it is yet another example of a market driven decision against coal that ideology and political policy cannot overcome.

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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