Muni Credit News August 30, 2016

Joseph Krist

Municipal Credit Consultant


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Regular readers of our twice weekly comments know by now that we feel strongly that the disclosure practices of municipal bond issuers are, to put it kindly, deficient. Now we see that the U.S. Securities and Exchange Commission has problems with those practices as well. We were heartened to see last week’s announcement of enforcement actions against 71 municipal issuers and other obligated persons for violations in municipal bond offerings.

The actions were brought under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.  The initiative offered favorable settlement terms to municipal bond underwriters, issuers, and obligated persons that self-reported certain violations of the federal securities laws.  Obligated persons are typically nonprofit entities such as hospitals and colleges that borrow the proceeds of bond issuances and are obligated to pay principal and interest on the bonds.

The SEC found that from 2011 to 2014, the 71 issuers and obligated persons sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations.  Continuing disclosure provides municipal bond investors with important information, including annual financial reports, on an ongoing basis.  The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.

The parties settled the actions without admitting or denying the findings and agreed to  agreed to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC.

The SEC has now filed a total of 143 actions against 144 respondents as part of the MCDC Initiative.  These actions are the first against municipal issuers since the first action under the initiative was announced in July 2014 against a California school district.  The SEC filed actions under the initiative against a total of 72 municipal underwriting firms, comprising 96 percent of the market share for municipal underwritings, in June 2015, in September 2015, and in February 2016.

There is disappointment in that the list of settling parties includes large and  sophisticated issuers. The usual arguments against stronger disclosure requirements tend to emphasize the relative small scale of many issuers and the cost of compliance relative to available resources. In this case, the 71 parties included state agencies, large cities and counties, and even two states. The list undermines the size argument as a defense against weak disclosure.

We have a relatively stark position on the question of disclosure. Our view is that issuance in the public debt markets is a privilege and that compliance with disclosure requirements is the price of participation in that market. We hope that the Commission continues to vigorously support the right of investors to full and timely disclosure and that issuers take their responsibilities more seriously.


Public employees in Marin County, California, failed to prove a state-mandated change in how their pensions are calculated unconstitutionally violated their employment contracts, an appeals court ruled. At issue in the case was a 2013 amendment to the County Employees Retirement Law that the state Legislature passed in order to curb the practice of “pension spiking.” Pension spiking occurs when “public employees use various stratagems and ploys to inflate their income and retirement benefits,” explained Justice James Richman, of the First District California Courts of Appeals, in an August 17 ruling.

Four Marin County employees, joined by five organizations that represent county employees, sued the Marin County Employees Retirement Association to stop the implementation of the new formula. They complained that they “agreed to accept employment and remain employees of their respective employers based on the promised pension benefit.” The trial court ruled in favor of the retirement association, stating that the new formula did not violate the employees’ constitutional rights.
The employees appealed, but the appeals court affirmed the decision. “While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension—not an immutable entitlement to the most optimal formula of calculating the unconstitutional. “Here, the Legislature did not forbid the employer from providing the specified items to an employee as compensation, only the purely prospective inclusion of those items in the computation of the employee’s pension,” Richman added. A pension can be spiked through an increase in final compensation or the inclusion of unused vacation pay in the benefit calculation.

After the economic downturn of 2008, underfunded public pensions received national attention. California’s legislature excluded some items from the calculation of county employees’ retirement income. Since then, localities have been seeking ways to reduce their future pension and health liabilities. this decision is clearly useful and credit positive for California localities seeking to make similar changes.


Last week we discussed the department of Justice’s decision to eliminate the use of private prisons. At that time, we warned that the real fear for municipal bond investors would be if facilities operating under contract with Immigration and Customs  Enforcement were to reach a similar decision. That day has now come one step closer.

Department of Homeland Security Secretary Jeh Johnson announced Monday that the Department  is considering curbing private immigration detention operations. The Secretary said that he directed the Homeland Security Advisory Council, chaired by Judge William Webster, to evaluate whether the immigration detention operations conducted by Immigration and Customs Enforcement should move in the same direction.

The DHS advisory council has until Nov. 30 to determine whether to follow the Justice Department’s lead. Johnson said he asked Webster to create an advisory council subcommittee “to review current policy and practices concerning the use of private immigration detention and evaluate whether this practice should be eliminated.” The subcommittee will lead the review, while the full council will file its evaluation to Johnson in November.

Should the DHS decide to suspend its involvement with private prison operators, it would strike a huge blow to the creditworthiness of many transactions which generate the majority if not the bulk of their pledged revenues through contracts with the DHS. These deals are located throughout the country although unsurprisingly many are located proximate to the southern U.S. border.


We think that it is always useful to review the cigarette consumption data that is available whenever a new tobacco securitization issue is poised to come to market. A smaller deal for a group of seven New York counties presents our latest opportunity to do so.

While we do not think that anything in the data suggests that the long-term trends in cigarette consumption will change, we would be remiss not to note that U.S. cigarette shipments did rise some 1.9% in 2015. IHS Global, the entity which projects cigarette consumption for securitizations, did not attribute the rise to any particular factor. The study also projects that the share of sales by participating manufacturers in the Tobacco Settlement Agreement will remain constant after a period of efforts by non-participants to increase sales.

What we found most interesting in this official statement, was data presented on the impact of New York State and particularly New York City’s tax policies on cigarettes. New York City has the highest taxes and retail per pack prices in the nation. It also has a thriving underground retail cigarette market. IHS data shows that less than 4 in 10 cigarettes purchased in New York are legitimately purchased and properly taxed. This is through smuggled packs sold at retail establishments or through the sale of individual cigarettes through street vendors.

While this phenomenon may not have a direct impact on the creditworthiness of tobacco securitizations, it is instructive as to the efficacy of extremely high tax policies as a deterrent to cigarette sales. Otherwise, we continue to believe that tobacco bonds serve best as a trading vehicle for larger investors and that the long-term risks to the credits don’t serve the needs of many individual investors.


The New York Convention Center Development Corporation, a subsidiary of the State’s Empire State Development Corporation, is planning to market some $413 million of revenue bonds backed by the proceeds of a $1.50 per night hotel room fee collected on hotel rooms in New York City. The bonds will fund a portion of the cost of the expansion of the thirty year old Javits Convention Center on Manhattan’s west side.

The City was somewhat late to the game of using hotel tax revenue bonds to finance public facilities. After years of concerted efforts by the Bloomberg administration to develop a tourist based economy, enough confidence in the durability of the tourism boom that followed and continues to this day was generated to support the issuance of hotel tax backed bonds. The pledged revenues in 2015 generated over $45 million of available revenues.

This produces coverage of just over 1 times debt service. The plan of finance assumes consistent annual growth in revenues of at least 1% through final maturity. Given the historical trend of revenues, it is not an unreasonable assumption. The world economic meltdown wasn’t enough to halt the trend and issues like relative currency values have not seemed to dent the trend either. It comes down to the fact that the one factor which could seriously impede the maintenance of positive tourism trends would be a breakdown in security in the City.

Fifteen years after 9/11, New York continues to be the area of the most concern in terms of it being a prime terrorist target. That regardless of the fact that the most recent attacks have occurred elsewhere. Paris has shown that there is a level and number of events which will damage tourism. This summer, after a number of incidents, the City of Light has seen a decline of one million in the number of visitors relative to prior summers. So it can happen but it takes a sustained number of incidents.


According to the U.S. Department of Labor, Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.

Through the years the nation gave increasing emphasis to Labor Day. The first governmental recognition came through municipal ordinances passed during 1885 and 1886. From these, a movement developed to secure state legislation. The first state bill was introduced into the New York legislature, but the first to become law was passed by Oregon on February 21, 1887. During the year four more states — Colorado, Massachusetts, New Jersey, and New York — created the Labor Day holiday by legislative enactment.

By the end of the decade Connecticut, Nebraska, and Pennsylvania had followed suit. By 1894, 23 other states had adopted the holiday in honor of workers, and on June 28 of that year, Congress passed an act making the first Monday in September of each year a legal holiday in the District of Columbia and the territories.

We honor Labor Day by only putting out one issue of the Muni Credit News this week. Enjoy your weekend and look for our next issue on Tuesday, September 6.

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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