Muni Credit News August 1, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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$550,000,000*

BAY AREA TOLL AUTHORITY

SAN FRANCISCO BAY AREA TOLL BRIDGE REVENUE BONDS

(Senior Bonds)

$550,000,000*

BAY AREA TOLL AUTHORITY

SAN FRANCISCO BAY AREA SUBORDINATE TOLL BRIDGE REVENUE BONDS

(Fixed Rate Subordinate Bonds)

BATA was created by an act of the state legislature in 1997 and began operations in January 1998 as the successor agency to California Transportation Commission’s Northern and Southern units of the San Francisco Bay Bridges. BATA’s mandate has been to manage the tolls on the seven Bay Area bridges and oversee the implementation of Regional Measures (RM)-1 and RM-2 approved by voters in two general elections. In July 2005 the state legislature passed AB 144 which granted BATA project financing and management responsibility as well as independent toll-setting authority for the bridges. The legislation also established the Toll Bridge Program Oversight Committee which has implemented a project oversight and project control process for Benecia-Martinez project and the SRP. The Committee consists of the Director of Caltrans, the Executive Director of the California Transportation Commission (the CTC) and the Executive Director of the authority. The oversight committee’s project oversight and control processes include reviewing bid specifications and documents, providing field staff to review ongoing costs, reviewing and approving significant change orders and claims and preparing project reports.

The senior lien bonds are secured by a prior claim on net toll revenues collected on the seven Bay Area bridges operated by BATA: San Francisco-Oakland Bay Bridge (SFOBB); San Mateo-Hayward Bridge; Dumbarton Bridge; Antioch Bridge; Benicia-Martinez Bridge; Carquinez Bridge and Richmond-San Rafael Bridge. The senior bonds have a cash-funded debt service reserve fund (DSRF) equal to the lesser of MADS; 125% AADS. The subordinate bonds are secured by a subordinate claim on the same net revenues and have a DSRF funded at maximum interest on the bonds at the option of BATA. All subordinate series currently have a DSRF equal to maximum interest.

The authority has independent rate-setting authority and no legislation or outside approval is required to adjust toll rates, though electronic and cash toll rates must be the same. The authority is required to increase tolls according to its adopted toll schedule in order to meet bond covenants, or for maintenance or construction. The authority must hold a public hearing and two public meetings 45 days before the toll increase, and provide 30 days’ notice to the Legislature.

$200,000,000*

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY

REVENUE BONDS

(LUCILE SALTER PACKARD CHILDREN’S HOSPITAL AT STANFORD)

The proceeds will provide funds for its expansion project, to fund routine capital expenditures and potentially acquire the long-term ground lease interest in land and improvements adjacent to the hospital for future use (owned by Stanford University). The bonds are secured by a gross revenue pledge of the obligated group. LPCH’s $1.2 billion hospital expansion project is almost complete, although the project is slightly behind schedule and cost overruns are likely. This bond issuance was unexpected and will provide another funding source for the sizeable project.

LPCH operates a 266-bed pediatric and obstetric hospital on the Stanford University campus in Palo Alto and 36 beds in several inpatient care units on its license in nearby community hospitals. In addition, LPCH manages several neonatal and pediatric units through joint ventures with other adult providers in the region. The obligated group includes only the hospital, which accounted for 98% of total assets and 94% of total revenue of the consolidated entity in fiscal 2016. Like many children’s hospitals,  LPCH has a strong track record in fundraising through the Lucile Packard Foundation with the last two capital campaigns raising over $1 billion. In the most recent campaign, $265 million is expected to be raised for the new facility and year-to-date $262 million has been raised with $256 million received in cash. The foundation is in the quiet phase of another campaign with a goal of raising $750 million.

Year-to-date fiscal 2017 operating results are negative due to one-time issues related to the loss of certain high-margin procedures. This impact was mostly in the first half of the fiscal year and the quarter-over-quarter trend has improved as LPCH has backfilled volume with the development of new related programs. The expectation is that fiscal 2018 operating performance will be in line with historical results.

$188,380,000*

REGIONAL TRANSPORTATION AUTHORITY

Cook, DuPage, Kane, Lake, McHenry and Will Counties, Illinois

General Obligation Refunding Bonds

Moody’s downgraded the Authority’s sales tax backed general obligation debt to A2 from Aa3, affecting about $2.2 billion of outstanding debt. The outlook remains negative. The outlook remains negative. The downgrade was tied to the State of Illinois’ ongoing fiscal instability. Payment deferrals have led RTA to rely on short-term borrowings that have created biennial refinancing requirements. This practice, while manageable, is only one measure of RTA’s potential stress stemming from the continuing financial erosion of its two largest related governments – the State of Illinois (Baa3 negative) and the City of Chicago (Ba1 negative). Over the long term, pressures to provide funding for constitutionally guaranteed state and local pension plans are increasingly apt to harm RTA’s economic base, eroding its ability to generate funding to support transit system capital investment and operating needs. Although these factors are outside the RTA’s control, they will pose increasingly serious challenges.

Nonetheless, the credit is seen as stronger than that of the State or City. The fact that the sales tax base includes the six county Chicagoland region is an important credit consideration. It also reflects the legal and practical insulation of pledged regional sales tax revenues.

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PUERTO RICO

As has been the case with the Puerto Rico restructuring process, the GDB process is running into significant opposition before it is even formalized. In spite of the fact that is has not yet been presented formally in the Legislature, San Juan Mayor Carmen Yulín Cruz announced Friday that she will challenge in state and federal courts a bill that seeks to validate the Government Development Bank’s (GDB) restructuring support agreement (RSA).

The bill is one of five to be considered in a special session called for July 31. It would create a new government entity that would issue bonds backed by GDB assets. The government bank’s bondholders and depositors, which mostly comprise municipalities, will have to select one of three tranches of notes. The plan is to close the GDB within a 10-year period.

The mayor of San Juan’s view is that the bill intends to prevent municipalities from going to court to demand reimbursement of funds they deposited in the GDB, which remain mostly frozen. Cruz’s position is that since the bill proposes to determine the balance of certain GDB liabilities, this confirms that the government bank “does not have clarity in its accounts” and is looking to “appropriate” certain funds deposited there.

Regarding the disbursement of special additional tax (CAE by its Spanish acronym) funds the bill would allow, the expressed a view that there could be preferences between towns and asked all mayors to prepare to fight the measure. “The request to the mayors is to do the math, because the money taken from them is money they won’t have available, unless they don’t start passing the problem onto citizens,” the San Juan mayor said, adding that the capital’s deposits would be used for essential services. This is true of the vast majority of the cities which deposited funds with the GDB.

NEW YORK

New York State is facing signs of increasing fiscal challenges, including lower revenue targets and possible federal budget and tax changes, according to a report on the state’s Enacted Budget Financial Plan issued today by New York State Comptroller Thomas P. DiNapoli. “The state’s fiscal outlook is clouded because of uncertainty in Washington, falling revenues, and fiscal practices that obscure the level of spending,” DiNapoli said. “If revenues continue to fall short, projected out-year budget gaps may grow further.” DiNapoli’s report found the state Division of the Budget estimates state tax receipts will increase by 4.8 percent in State Fiscal Year (SFY) 2017-18, below the 6.1 percent projected in February. Personal income tax receipts in the first quarter of the fiscal year were $1.7 billion lower than February projections and $1.5 billion lower than what was collected in the same period last fiscal year.

The General Fund balance at March 31, 2017 was $7.7 billion. Settlement money represented more than two-thirds of the total. By the end of the current fiscal year the balance is expected to be one-third lower than its recent peak of $8.9 billion two years earlier. Through March 31, the state has spent $3.1 billion from settlements received in the last three fiscal years. Nearly half has been used for budget relief. Another $461 million of these one-time resources is expected to be spent for budget-balancing purposes this fiscal year. The state is also using settlement funds for cash flow and debt management purposes.

The Financial Plan shows that spending from State Operating Funds will rise 2 percent this year, to $98.1 billion. This figure reflects several actions that complicate the picture of year-over-year spending growth. These include: the use of prepayments; certain program restructurings which result in costs being reflected as reduced receipts rather than disbursements; shifting spending to capital projects funds; deferring expenditures to future years; and the use of off-budget resources to pay for certain program costs. Adjusting for such actions, the increase in State Operating Funds spending is approximately 4 percent.

No deposits to rainy day reserves were made in SFY 2016-17, and none are projected in the current fiscal year. Reserves represented more than 13 percent of General Fund disbursements in SFY 2015-16, primarily because of settlement revenues. They are projected to decline over five consecutive years to less than 4 percent by SFY 2020-21. State-Funded debt outstanding is projected to rise 4.1 percent this year, to $63.9 billion, and to reach $73.7 billion by the end of the Capital Plan period. State-Funded debt service is expected to approach $8.4 billion as of SFY 2021-22, reflecting an average annual increase of 3.1 percent over the coming five years.

This outlook accompanies the news that State tax collections totaled $18.6 billion in the first quarter of the new fiscal year, $1.2 billion less than the same period last year and $315.7 million below projections, according to the latest state cash report issued by State Comptroller DiNapoli. “We’re three months into New York’s fiscal year and personal income tax collections are falling short of what was expected,” DiNapoli said. “Taxpayer anticipation of federal tax changes has contributed to the decline. Offsetting that, business tax collections are well over estimates.”

Through June 30, All Funds receipts totaled $37.7 billion, representing a decline of $680.6 million or 1.8 percent from a year earlier. The drop was primarily due to the personal income tax (down $1.5 billion or 11.6 percent) and miscellaneous receipts (down $640.8 million or 10.9 percent), but was partially offset by an increase in business tax collections (up $266.6 million or 16.5 percent) and federal receipts (up $1.2 billion or 9.2 percent). Overall tax collections totaled $18.6 billion through the first quarter, representing a decline of $1.2 billion or 6.1 percent from the same period last year.

All Funds spending totaled $41.1 billion in the first quarter of the fiscal year, approximately $3.1 billion or 8.3 percent higher than for the same period last year. Significant increases include spending for Medicaid (up $1.6 billion primarily from federal sources) and education (up $767.1 million). All Funds spending was $1.4 billion below projections, primarily in local assistance and capital projects. The General Fund ended June with a balance of $3 billion, which was nearly $4.2 billion lower than a year earlier but $548.3 million higher than the latest projection.

WHAT IS WISCONSIN DOING?

The deal announced that calls for $3 billion of state and local tax breaks for Taiwanese manufacturer to build a manufacturing facility in southeast Wisconsin has generated much comment. Much of it has questioned the basic underlying economics for the deal. Critics point out the Foxconn workers worldwide are much less productive than the average Wisconsin manufacturing worker. They also point out that the average compensation promised is about 50 cents an hour higher than the average wage in Wisconsin. Details made public so far do not indicate whether this annual amount is just salary but all in employee costs including insurance and other benefits. If it does than the hourly wage is below the private sector average in a state with a 2.9% unemployment rate.

This may account for the language in the state’s release that acknowledges a possible in-state worker shortage for the plant.  Given it’s proximity to Illinois, is Wisconsin subsidizing jobs for Illinois residents? Wisconsin is seen as promising to pay Foxconn the equivalent of $66,600 per employee, based on having 3,000 workers in the plant, for each of the next 15 years, while Foxconn is promising pay of less than $54,000 a year. Foxconn has implied that it could eventually employ 13,000 but it’s track record of keeping promises in other US jurisdictions is poor.

One analyst asks if it’s worth it for each Wisconsin household is stuck with a nearly $1,200 bill to subsidize a company that is half as productive as Wal-Mart, and one-tenth as productive as Harley-Davidson. Tax breaks for manufacturing jobs have been a topic of long term debate and the evidence is quite mixed at best.

CHANGES AT LAGUARDIA AIRPORT P3 STILL MAINTAINS PRIVATE ROLE

The Port Authority board signed off on a revised financing package for Delta’s facility update which is being undertaken separate from the overall renewal of LaGuardia Airport. Often times when issues arise for one of the private entities in a P3, the public entity in the partnership winds up increasing its financing risk.  Here, the Port Authority had agreed in January to enter a 33-year lease for the Delta terminal with an entity owned jointly by Delta and West Street Infrastructure Partners III, a fund managed by Goldman Sachs.

The entity was to contribute $300 million in equity investments and $3.6 billion in debt financing for the design, construction, and financing of a new 37-gate terminal. Now Delta plans to pay for nearly the entire project by itself after Goldman exited the deal. The Port Authority of New York and New Jersey will still contribute up to $600 million as previously agreed.

It is not clear why Goldman dropped out. Without Goldman, the equity component is no longer necessary and Delta will use a combination of direct investments and debt financing. Delta alone will be responsible for any potential cost overruns. It is good to see a situation where financing issues on the private side occur and they are solved on the private side of the P3 equation.

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 advisers prior to making any investment decisions.

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