Muni Credit News August 25, 2016

Joseph Krist

Municipal Credit Consultant


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A week ago we discussed the State’s proposed cash flow borrowing. This before the full scope of the damage from flooding in the Baton Rouge area had become apparent. Now that the level of devastation is clearer, it is easy to conclude that the State fiscal condition could be in serious trouble as a result.

The picture is, as in the case of most large scale natural disasters, much more complex. Clearly, there will be real disruption to the economic life of the area and significant expense demands on government. But they may not be as harmful as one might assume. Many of the costs of recovery will be borne by the federal government. FEMA will reimburse the vast majority of government expenditures. As for the impact on the State’s fiscal position, the interruption to some revenue sources will be offset by a high level of retail sales and economic activity related to the repair and replacement of homes and businesses.

This activity will drive a large and concentrated burst of sales tax revenues. Businesses that generate these revenues will also receive taxable income. Clearly, there will be dislocation and disruption but the overall effect on the State’s credit will be less than one would imagine at first blush. It’s been proven time after time in areas impacted by natural disasters.


Earlier this month, we questioned the assignment of a stable outlook to the Commonwealth of Pennsylvania’s general obligation bond rating. Our stance was reaffirmed with the announcement from Pennsylvania Treasurer Timothy A. Reese that he had extended a $2.5 billion line of credit to the Commonwealth of Pennsylvania. A draw of $400 million from the line of credit to the General Fund was immediately made to prevent the General Fund cash balance from falling into the negative this month.

This is the second time in 2016 and the third time in 23 months that the state has needed to borrow money to meet short-term cash needs illustrating the ongoing structural budget deficit facing the commonwealth. While progress has been made on reducing the structural deficit, additional revenues enacted as part of the 2016-17 budget will not be fully realized until late in the fiscal year and, as a result, the General Fund balance began this fiscal year with $500 million less than the previous fiscal year.

The Treasurer said “The General Fund’s low cash balance so early in the fiscal year is a troublesome sign and illustrates the need for Pennsylvania to adequately and decisively address its ongoing structural deficit. While Treasury will continue to work with the administration and the General Assembly to manage these continuing shortfalls, until our state’s fiscal house is in order Pennsylvania’s credit rating will continue to suffer, and taxpayers will pay more to fund our debt.”

In our view this is exactly why we questioned the assignment of the stable outlook. Just because this kind of borrowing is internal rather than public, it doesn’t make it a better situation than is the case in, for example, Louisiana which is borrowing less in public. We understand that the Commonwealth has borrowed to cover a short term General Fund shortfall 15 times over the past 24 years. The borrowing maximum under this line however, is $1 billion greater than at any time since 1991.


One of the more prolific issuers in our market is bringing a new credit to the new issue marketplace. One of New York’s best known real estate development projects is the West Side Redevelopment project. Any visitor to the city would likely be familiar with the huge amount of commercial and residential high rise construction underway from 9th Avenue to the Hudson River. One of the more complicated and controversial aspects of the plan was the construction of platforms over a long existing railroad yard complex which serves Pennsylvania Station.

The air rights and the platform over the yards will serve as the base on which additional construction will take place. The Metropolitan Transportation Authority owns this asset and is now in a position to monetize it. Hence the creation of the MTA Hudson Rail Yards Trust.

The Trust plans to issue $1.057 billion Metropolitan Transportation Authority (MTA) Hudson Rail Yards Trust Obligations. The bonds to be issued  will be payable solely from the Trust Estate established under a Trust Agreement. The trust estate consists principally of monthly ground rent from tenants of the ERY and WRY, monthly scheduled transfers from a capitalized interest fund, payments made by the tenant upon the exercise of fee purchase options, contingent support payments made by the MTA (including interest reserve advances), and rights of the MTA to exercise remedies under the leases and rights of the Trustee to exercise remedies under the leases and the Fee Mortgage.

The trustee will have a first secured lien on the MTA’s fee simple interest in the owned property under the Eastern Rail Yard and Western Rail Yard leases which are not cross defaulted nor cross-collateralized. The mortgages will secure the MTA’s obligation to pass on payments of ground rent and fee option payments received from tenants under the ground lease. If the MTA does not exercise cure rights following a lease non-payment event of default, the trustee may exercise its remedies under the each fee mortgage. These include foreclosing MTA’s fee interest. The Trustee will have the right to step into the MTA’s position as owner of the property and act as landlord under the defaulted lease. This gives the trustee the right to terminate the lease and sell and/or re-lease the property.

At its core, the financially responsible party for the obligations is the MTA. The leases call for   escalating, fixed ground rent payments, as well as a requirement that the MTA provides for interest reserve replenishment for up to 7 years following a lease default.  Proceeds will finance transit and commuter projects of the various affiliates and subsidiaries of the MTA, to fund an interest reserve requirement of 1/6th of the greatest amount of interest in the current or future years, pay capitalized interest and fund costs of issuance.

The bonds received an A2 rating from Moody’s. While constructed to be a primarily stand alone credit, the financial health of the MTA will still be a key factor in any rating analysis. This reflects the liquidity provision requirements in the event of a lease default. Moody’s is clear that the rating on these bonds is tied to the rating for  the MTA’s Transportation Revenue Bonds.


The realities of the difficulties inherent in funding Chicago’s pension liabilities was highlighted when Mayor Emanuel announced that senior citizens would get a break on the water and sewer service tax, proposed in early August. Some 66,000 or so Chicago residents 65 or older who live in single-family homes would be exempt from the new tax. The proposal is meant to appease aldermen unhappy with the plan to shore up the municipal workers pension fund.

Seniors already do not pay for sewer service, which accounts for half of the bimonthly bill. Those who do not get separate water and sewer bills, as is often the case in condominiums and town homes, will continue to be eligible for a $50 annual rebate on their water and sewer bill, but they would not get a break on the new tax.

Many aldermen would prefer a number of alternative revenue sources such as a city income tax or another property tax increase. Those would be more difficult to enact. An income tax would require state authorization, posing political difficulties for legislators. The mayor opposes  another property tax increase after two property tax increases for the City and Chicago Public Schools.

The City estimates the water and sewer tax to eventually raise $239 million a year, to be used to increase contributions to the municipal pension fund. A group of 11 aldermen have asked the administration for the schedule of contributions to the city municipal worker pension system over the next 40 years. They want to be sure that the new water and sewer tax would cover the pension cost before they vote on it next month.

City officials however,  said the city has yet to run those numbers. It is still doing calculations on existing new plans to increase contributions to the city laborer’s plan with revenue from the already increased emergency communications fees on all landlines and cell phones billed to city addresses.


At the City’s request, Public Resources Advisory Group (PRAG) reviewed portions of the San Diego Integrated Convention Center Expansion/Stadium and Tourism Initiative’s (the “Initiative”) financing approach for a combined convention center and Chargers stadium. PRAG did not independently verify is the reasonableness of the total Project Cost estimate of $1.8 billion.

The Initiative relies on increasing the City’s Transient Occupancy Tax rate by 6%. Of the new 6% levy, the first 1% would be transferred “off the top” to the Tourism Trust Fund (“TTF”). The remaining 5% would then be available for the transfer of a second 1% to the TTF (after the payment of debt service), which together with the initial 1%, would replace the current 2% Tourism and Marketing District Assessment (“TMDA”), and for the financing, planning, construction, operations and maintenance and future capital improvement costs of the Project. These TOT revenues would be used on a pay‐go basis and to pay debt service on TOT‐backed revenue bonds. In addition, they are required to be used in a certain order, with the City’s general fund having the lowest priority in the flow of funds. The ability of these TOT revenues to meet the Initiative’s requirements is the primary financial risk factor to the City.

Various aspects of the current Project Cost are still being evaluated and are subject to change over time. Goldman Sachs (GS), the Chargers’  banker, estimates a 30 year interest rate of 4.25% on the project. The GS financial model assumes a $1.8 billion total project cost: the Chargers would contribute $650 million to the Project, and 5% of the 6% TOT increase in the Initiative would be available to fund or finance $1.15 billion of Project Costs. Those Project Costs would include convention center construction costs, any allocated costs in the combined convention center/stadium, and all costs for land acquisition, environmental mitigation and ancillary infrastructure.

Currently, PRAG found that with only 1% of the 6% of the TOT levy associated with the Initiative having priority over debt service, the credit quality of the TOT‐ backed revenue bonds is much more protected from revenue shortfalls and cost overruns than Overall Coverage which includes debt service, the second 1% transfer to the TTF, O&M and CapEx, all of which have to be met prior to the City’s general fund receiving any of these TOT revenues.

PRAG states that the future TOT revenue growth assumptions, the current Project Cost estimate and a 4.25% all‐in interest rate reflected in GS’ numbers underpin the ability of the Initiative to pencil out financially. PRAG views each of these assumptions and all three of them on a combined basis as not conservative for a Project with this long of a lead time and are subject to significant risk of change.

All of this will be part of what will be an active debate leading to the vote on November 8. The study is one more piece in the complex debate over the entire phenomenon of public financing of stadiums for professional sports teams.


A U.S. District Court Judge stayed a lawsuit filed by Ambac Assurance Corp. against the Puerto Rico Highway Authority (PRHTA) seeking to block a lease extension of two island toll roads.  The stay was granted  because Ambac did not challenge the applicability of a provision of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) that stays lawsuits against the government. Ambac was given until Friday to say whether they wish to join other parties in other cases at a September hearing to determine if cause exists to vacate the Promesa stay.

Plaintiffs in the lawsuit Lex Claims v. García Padilla until Aug. 25 to file a motion on a notice of stay filed by the government. Aurelius Capital Management, Autonomy Capital, Covalent Partners, FCO Advisors, Monarch Alternative Capital and Stone Lion Capital Partners had filed suit July 20 to stop the government from transferring funds from bondholders contending it violated Promesa.

The judge  is planning to schedule a hearing in September to determine whether to stay lawsuits filed by National Public Finance, which seeks to limit the island’s moratorium law and by Brigade Leveraged Structures, which seeks to stop the Government Development Bank from transferring funds to agencies.

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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