Muni Credit News August 11, 2016

Joseph Krist

Municipal Credit Consultant


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Senate President Stephen Sweeney all but declared dead a ballot question to mandate more funding for New Jersey’s troubled pension system – costing an estimated $20 billion over five years. It had been his top legislative priority. He is expected to run for governor in 2017 and spent more than a year pitching his plan as a lasting fix to New Jersey’s pension-funding crisis, one of the worst in the country.

By cutting more than $2 billion from pension payments during the budget crisis in 2014, Gov. Christie triggered a series of downgrades from Wall Street credit-rating agencies and several lawsuits from unions. The state Supreme Court upheld Christie’s pension cuts last year, even though Christie had signed a law pledging to make them in full. Democrats in response proposed a constitutional amendment – which must be approved by the voters – to overturn that court ruling.

The Assembly approved the ballot question in June. But the Senate has not done so and needed to act before the constitutional deadline on this past Monday to place the measure on November’s ballot. Sweeney said it would be “irresponsible” to proceed with the pension amendment at a time when lawmakers do not know how much a potential transportation deal will cost in future tax revenue (see the 7/28/16 MCN). Of the two leading transportation plans, one would cost $550 million and the other $1.7 billion in lost annual revenue after being phased in over several years. Sweeney ruled out raising taxes or cutting from other areas of the budget to meet pension and transportation costs.

Sweeney’s position represents a shuffle in the usually expected politics of pensions. Union leaders called the democrat ” a liar” and the state director of the Communications Workers of America union, said the amendment is needed because politicians like Christie and Sweeney keep moving the goal posts on their pension-funding promises, she added. “It’s been over two decades since any administration – Republican or Democrat – made a full pension payment,” she said. The amendment would increase pension payments over five fiscal years with some of the strongest legal language available anywhere in the country. Pension payments would have become the top priority in the state budget every year in perpetuity – impervious to any budget cuts even after the first five years. The amendment also would have required state officials to make pension payments on a quarterly basis. No state mandates quarterly pension payments through its constitution.

Spread out over five years, the amendment’s cost would have been $20 billion, according to the nonpartisan Office of Legislative Services, starting with a $2.4 billion payment in fiscal year 2018. New Jersey’s state budget this year is $34.5 billion, and Christie is proposing to make a $1.9 billion pension payment, what would be the largest in state history, but only 40 percent of what actuaries say is needed to fully fund the retirement benefits workers have earned.

Sweeney supported the amendment for months, stressing that pension costs grow exponentially for state taxpayers over the long term with each passing day that the pension system’s problems are further neglected. Christie, Republican lawmakers and business groups are all opposed to the pension amendment. Bondholders should be concerned about provisions which place pension payments ahead of debt service no matter how positive the full funding of pensions would be from a ratings perspective.


Recently the outlook for the State of Connecticut come under scrutiny. We note the fact that while aggregate state wealth indicators are strong, many of its cities had been hollowed out economically and faced significant financial challenges on their own. The recent release of a preliminary official statement by the City of New Haven in support of a pending GO bond sale gives us an opportunity for a case study.

The City’s role as the home of Yale University is well known. The surrounding city has not benefitted from its presence as much as one might think and the relationship between the University and the residents has been fraught for years. The local economy has struggled and the property tax base has stagnated. As a result, the City has high demands for services but its capacity to raise revenues has been strained.

In recent years, the City has been able to maintain control of expenditure growth with the budget growing less than 2% per year since 2009. Expenditures have increased from $456 million to $509 million over that period. Unfortunately, like the State, the City faces steady growth in its liabilities for pensions and other post employment benefits (OPEB). These have grown to present the greatest fiscal challenge to the City.

Pension funding contributions have been increasing regularly if at uneven rates since 2009, growing by a total 65.8% over that period. In spite of this effort,  which has increased the share of pension funding from 6% to 9% of total expenditures, the funding ratio for these liabilities has decreased from 60% to 39% for non-uniformed employees and 58% to 50% for uniformed employees. This reflects a combination of disappointing investment returns combined with a rapid rate of increase in accrued liabilities as employees age out and retire. It also reflects a nationwide policy of addressing lower salary growth through the use of increased pension benefits as a negotiating tactic with employee unions.

Scarier is the lack of asset accumulation for OPEB by the City. It essentially funds these on a pay as you go basis. These liabilities have now increased to 184% of annual payroll. At the same time, the funding ratio for these liabilities has stood at 0.1%. This because the City only began the asset funding process in 2012 and only made appropriations for this purpose in two years.

The City is rated Baa1 by Moody’s and A- by S&P and Fitch. The latter two have positive outlooks on their ratings. Our view is that such an outlook is hard to justify in the face of these liability issues along with the low return investment environment we are in. Given that the funding ratios reflect assumed annual investment returns of 8% (and that is a decrease) each additional year of investment underperformance will further pressure funding ratios. In the face of this kind of fiscal pressure, we cannot see this as a positive situation and the bonds are a triple B credit. They need to be priced accordingly.


We normally would not give a lot of weight to primary results in state government races but this year’s primary in Kansas is a unique situation. For some time we have negatively commented on the outlook in Kansas which results from the strong ideological bent of its legislature and Governor Sam Brownback. Last week, voters went to the polls to choose candidates for the November general elections for state legislators. To say that they sent a message is an understatement.

The results cut deeply into the Senate’s conservative voting majority and may have reversed it in the House, especially if Democrats pick up a few more seats in November. Moderates and Democrats regularly teamed up to block right-wing legislation until conservative challengers purged the Senate of most of its moderates in the 2012 Republican primaries.

The moves to eliminate the income tax were designed to stimulate business growth and employment but failed to do so. The governor’s signature tax plan exempted more than 300,000 business owners from paying any income tax. What they did accomplish was to diminish state revenues and force cutbacks in expenditures in the form of lower aid to local school systems and highways. Schools and roads are among the more cherished services for Kansas voters.

In the meantime, Kansas missed revenue expectations for June by more than $33 in the 2016 fiscal year, which ended June 30, and after the state lowered revenue estimates significantly in April. The bulk of the June shortfall can be attributed to lower-than-expected income tax receipts. Corporate income tax receipts are expected to be $20 million below expectations, and individual income tax receipts are expected to be $18 million off the mark. Some other types of taxes outperformed estimates, but not enough to fully offset the loss.


Scranton, PA has been a city on the decline for nearly a century. The demise of the anthracite coal industry and its role as a railroad hub have long been documented. It has led to long term declines in population and property values. This led to continuing budget imbalance and reliance on increased tax and financial gimmickry. Eventually, the City’s bag of tricks emptied and it found itself in the Commonwealth of Pennsylvania’s Act 47 Distressed Cities Program.

Under the program, the City was supposed to undertake a five year plan of fiscal renewal such that it could leave the program in 2017. Unfortunately, the City was unsuccessful in its implementation of the revenue adjustments and workforce changes required under the 2012 plan. A deficit is projected for each of the next five fiscal years with the 2020 deficit estimated at $19 million or nearly 20% of expenditures. A revised recovery plan along with an extension of the Recovery Period to 2020 has been adopted. The plan is designed to help the City to avoid a declaration of fiscal emergency in the next two years.

The plan includes an increase in the local services tax from $52 to $156 per year. Right now, earned income and local property tax revenues cover on $56 million out of $71 million of employee expenses (wages and pensions). It seeks to sell the City-owned parking system and looks to the fees charged for sewer services as a source of funding for the City’s unfunded pension obligations. It calls for asset sales and application for grants from the Commonwealth.

The City has applied to sell the Sewer System to a private operator. Estimated proceeds re $110 to $120 million, with 80% due to the City. If successful, the City will apply its proceeds to defeasance of $18 million of debt and to funding $65 million of unfunded pension liabilities. In spite of this significant cash infusion, the funding ratios for the City’s pension funds will still be only 50%.

It is the view of the Plan’s developer that without implementation of all elements of the Plan, the City will need to declare a fiscal emergency. Even if implemented, property taxes may have to be raised. The City’s $132 million of debt will need to be refinanced. The Plan suggests the use of pension bonds payable from dedicated earned income tax revenues as a part of the solution.

Of more immediate concern is the need to issue some $35 million of GO notes. These notes, maturing in 10 and 15 years, will be full faith and credit obligations of the City. Unfortunately, the problems outlined above present a very weak credit in support of that pledge. There has been a lack of public political support for raising taxes and fees and even less political will on the part of local politicians. Without those to factors and the means to pay, the City’s debt remains at best a highly speculative investment.


In our April 14, 2016 issue we commented on the problems facing the I-69 Section 5 project that is a part of an Indiana highway that is being expanded to handle expected increased truck traffic resulting from NAFTA. Isolux Corsan SA (Isolux) is the parent of the construction contractor, Corsan-Corviam Construccion SA, whose rating was revised to ‘B-‘/Rating Watch Negative on Feb. 12, 2016. Those problems have continued. Now, Fitch Ratings has downgraded the Indiana Finance Authority’s private activity bonds (PABs) issued on behalf of I-69 Development Partners LLC (I-69 DP or the Developer) for the I-69 Section 5 project to BB from BBB-. The bonds remain on Rating Watch Negative.

The downgrade reflects continued delays in construction and unresolved payment issues between the construction contractor and subcontractors, culminating in two Notices of Default issued by the Developer to the construction contractor, citing failure to promptly pay subcontractors and falling behind on an existing remedial plan, which have 20 and 60 day cure periods, respectively.

Delay risk is also heightened by the financial deterioration of Isolux Corsan SA (Isolux), parent of the construction contractor, Corsan-Corviam Construccion SA, whose rating was revised to ‘RD’ (Restricted Default) from ‘C’ on Aug. 3, 2016, reflecting the execution of a Distressed Debt Exchange following recent filings for forms of court protection. The company has confirmed that, to date, it has met payments but non-payments are planned under restructuring plans.

This transaction continues to be a great advertisement for the perils of P3 projects for both investors and for governments who hope to benefit from the “efficiencies” of the private sector in lieu of traditional funding for public projects.


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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