Muni Credit News April 6, 2016


Joseph Krist











New York State began operating in fiscal 2018 under  emergency legislation to keep the state government in operation after efforts to pass a state budget for the 2017-18 fiscal year faltered during weekend-long talks. The fiscal year began at midnight on Friday with no deal in place. The irony is that the dispute is not over monetary issues but rather about policy issues.

The extender would have a punitive side effect for the legislators, who would not be paid during its duration. And the governor’s submitting an extender that would last until the end of May — when the federal budget would come into focus — could mean a prolonged stretch without paychecks for lawmakers.

As we go to press, the Senate passed four budget bills — with more legislative action expected after midnight. The Democrat-led New York State Assembly came to terms on a bill that would raise the age of criminal responsibility in the state to 18, an issue that had been a major stumbling block in the state budget negotiations.

New York is one of two states, along with North Carolina, that treat 16- and 17-year-old defendants as adults. According to a summary of the legislation, all misdemeanor charges faced by 16- and 17-year-olds would be dealt with in Family Court. Nonviolent felony charges would be dealt with in a new youth section of Criminal Court, with many of those cases eventually being sent to Family Court, excluding cases in which a district attorney can prove “extraordinary circumstances.” Beginning in late 2018, juveniles would not be kept with adults in county jails.

Violent felony cases would remain in Criminal Court but would be subject to a three-part test: whether a “deadly weapon” was used, whether the victim sustained “significant physical injury,” and whether the perpetrator engaged in criminal sexual conduct. Barring one of those factors, violent felony cases could also be moved to Family Court.

Other issues include including a renewal for 421-a, a lapsed tax-cut program for developers that was meant to produce low income housing; support for charter schools; changes to the workers’ compensation system; and education aid. The extender did include infrastructure funds, such as a major clean water initiative, and some lesser policy proposals, like a plan to cap and manage the cost of prescription drugs under Medicaid. But many of the deals that seemingly had been settled — such as allowing ride-hailing apps to be used upstate — were not included. Lawmakers have already passed a portion of the budget approving debt payments.


Now that the initial effort to repeal and replace the ACA has failed, the next focus for the municipal bond market is the potential impact of tax reform. Three potential impacts on state credits are apparent: the impact on the economy; the direct impact of tax reform on state government tax bases in cases where states conform to federal tax law; and  indirect impacts on state tax revenue as taxpayers change their behavior in anticipation of, and in response to, federal tax reform. Two of these are forward concerns but it appears that the third may already be having a dampening impact on tax revenues.

The likelihood of lower tax rates in 2017 likely created a large incentive for high income taxpayers to push income from wages, interest, and other sources out of 2016 into 2017, and to accelerate deductions into 2016, depressing taxable income in 2016. A proposed increase in the standard deduction created a modest incentive for middle-income taxpayers to accelerate itemized deductions into 2016. Initial data suggests a slowing of state revenue growth. Fourteen states reported declines in total tax revenue for the third quarter of 2016, with two states reporting double-digit declines. Total state government tax revenue grew 1.2 percent in the third quarter of 2016 relative to the prior year. All major tax revenue sources grew, except the corporate income tax, which declined 10.4 percent. Individual income tax collections grew 2.7 percent, while sales tax and motor fuel tax collections grew 2.0 and 1.1 percent.

It is difficult to make a blanket statement about states given the importance of energy based revenues and economic activity. The steep oil price declines throughout 2015 and early 2016 led to declines in severance tax collections and depressed economic activity. Total tax collections also declined in the other oil and mineral-dependent states, including New Mexico, Oklahoma, Texas, West Virginia, North Dakota and Wyoming. Fourteen states reported declines in personal income tax collections, with three reporting double-digit declines. Some of that was related to a depressed energy sector.

We have always used sales taxes as a good proxy for near term trends. Among individual states, thirty-three states reported growth in sales tax collections in the third quarter of 2016, with twelve states reporting declines. Six of those are oil- and mineral dependent states. For analysts such as ourselves, the usefulness of sales tax as an indicator has been diminished in recent years by the demise of brick and mortar retailing. This trend has only been partially mitigated In calendar year 2017 in that eleven states have joined other states that already collect taxes on sales by LLC or its subsidiaries, raising the number to forty-two out of forty-five states that impose a general sales tax. The problem is that while the dominant online retailer, state efforts alone have had limited effectiveness. Federal legislation may be the only way to fully capture retail sales activity into state tax bases.

Unfortunately, the state budget process will likely outpace the speed at which final federal tax reform can be undertaken. Thus the states will be operating in a somewhat opaque environment as they attempt to estimate revenues for the upcoming fiscal year.


California revenues of $6.52 billion for February fell short of projections in the governor’s proposed 2017-18 budget by $772.7 million, or 10.6 percent. Personal income taxes (PIT), corporation taxes, and retail sales and use taxes all fell short of January’s revised budget estimates for February, and only corporation taxes—the smallest of the three—topped fiscal year-to-date projections in the governor’s proposed 2017-2018 budget. For the 2016-17 fiscal year that began in July, total revenues of $73.28 billion are $663.9 million below last summer’s budget estimates, and $888.1 million short of January’s revised fiscal year-to date predictions.

In the current fiscal year, California has collected total PIT receipts of $50.97 billion, or 0.9 percent less than January’s revised estimate. Corporation tax receipts of $168.2 million for February were 35.0 percent short of assumptions in the proposed 2017-18 budget. Fiscal year-to-date corporation tax receipts of $3.82 billion are 3.3 percent above projections in the proposed budget. February sales tax receipts of $3.06 billion missed expectations in the governor’s proposed 2017-18 budget by $710.2 million, or 18.8 percent. For the fiscal year to date, sales tax receipts of $16.29 billion are $613.5 million below the revised estimates released in January, or 3.6 percent.


The Puerto Rico government and some of its creditor groups have signed confidentiality agreements—a first step toward negotiations that could begin as soon as or this week—the island’s Financial Advisory & Fiscal Agency Authority (FAFAA) confirmed Monday. The identity of creditor groups was not revealed. Advisers for the commonwealth government and Promesa’s fiscal control board hope to kick off mediation talks as soon as next week in New York City. The goal is to solve the controversy between general obligation (GOs) and Sales Tax Financing Corp. (COFINA) bondholders. A letter states that the private mediation process will not prevent “other mediations/negotiations between the same parties or others regarding these or other disputes.”

The letter outlines other details of the framework for the negotiations, which include making public any government offer made to creditors during mediation 48 hours after it ends, or April 21—whichever occurs first. Subsequent proposals from the government would need to be disclosed no later than each Friday after April 21.

Former judge Allan Gropper is listed as mediator in the process. Several creditor groups opposed the board’s plans for mediation, arguing there should be initial talks before a mediation process, which would take a long time to kick off. The group included the GO ad hoc group; OppenheimerFunds, Franklin, Goldman Sachs, UBS and Santander; and monoline insurers  Assured, FGIC, Syncora and National. The government and the board are said to be open to receive restructuring proposals from creditor groups that refuse to enter the mediation process. Yet any such offer would be subject to Gropper’s input and be shared and discussed with creditors participating in the mediation.

In the meantime, the U.S. First Circuit Court of Appeals reversed a ruling by U.S. District Court Judge Francisco Besosa that has the effect of staying the entire Lex Claims case, in which general obligation (GO) bondholders challenged the constitutionality of the Sales Tax Financing Corp.’s (Cofina) structure. “The district court’s holding that the PROMESA stay did not apply to the plaintiffs’ first, second, third, and 12th causes of action is reversed, and the matter is COFINA bondholders’ motion to intervene solely for the purposes of addressing the issue is therefore moot,” the Appeals Court ruled.


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.


In 2005,  the Village of Bridgeview, IL issued $135 million of general obligation (GO) bonds for a stadium that it owns and manages. The stadium serves as the home field for the Chicago Fire of Major League Soccer. Like many of the league’s franchises, it chose to pursue its own facility with a smaller capacity rather than play in an existing football stadium located in the center of a metropolitan area. The idea was to produce a venue with the atmosphere of a European ” “football” venue and take advantage of what is seen as a high level of interest among suburban residents who are seen as primary customers for the sport in the US.

With seating for as many as 28,000, Toyota Park, which opened in 2006, hosts soccer games, concerts and other events. The motivation for the Village was to create a facility which would act as a catalyst for economic activity around the games trying to capture the pre and postgame atmosphere that one often finds with European venues. Alas, the level of economic activity generated by the existence of the stadium has, not surprisingly, fallen short of expectations.

The Village has persistent weak liquidity and weak management conditions. Multiple debt restructurings as a result of management’s decision to construct and finance an underperforming stadium and declines in the tax base have led to a high debt burden. For an entity of its size its $234 million general obligation tax burden is significant. The Village has attempted to manage this debt through tax increases, asset sales, refinancing, and the use of variable rate debt. Bridgeview, which has used restructurings in the past to ease debt service payments and minimize property tax hikes, to continue the practice, possibly pushing bond maturities out to years beyond the useful life of the stadium. The most recent proposal the Village was considering to restructure $24.5 million of variable-rate bonds to a fixed-rate mode with a 2047 maturity.

The whole stadium saga has now culminated in the Village’s bond rating being lowered to BB- by S&P. S&P is concerned that the Village faces reduced market access and weakened liquidity  as well as acute business, financial, and economic uncertainties related to its debt burden, particularly the debt issued for its Toyota Park stadium.

So add Bridgeview, IL to the list of cautionary tales regarding public financing for professional sports facilities. And sadly, it was an “own goal” on the part of the Village.


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 million;  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.

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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