Muni Credit News December 1, 2016

Joseph Krist

Municipal Credit Consultant










As we approach the dawn of a Trump administration, the ongoing saga of high speed rail in Florida merits continuing attention. It is anticipated that public private partnerships would have from increased support from the White House.  The difficulties encountered by many of these projects away from their financial aspects have been a source of  bewilderment to participants and observers across the spectrum of viewpoints. Our particular ongoing interest in this project reflects its role as a poster child for those difficulties.

The latest turn in this saga comes from Washington. The U.S. Department of Transportation, at the request of All Aboard Florida’s sponsors has rescinded its approval for $1.75 billion of tax-exempt bonds for the passenger railroad and instead approved $600 million for the Miami-to-West Palm Beach segment, the first phase of the project. The action is seen as an attempt to frustrate Martin and Indian River counties’ fight in their ongoing legal actions in federal court against development of the railroad.

The  counties have argued that All Aboard Florida cannot complete its project without the tax-exempt financing, and they contend that the proposed bond issue  is unlawful because the Department of Transportation approved the financing before a final environmental review was completed.

This week, All Aboard Florida asked the court to throw out the case. It contends that the issues raised by the counties cases are moot,” in documents filed in U.S. District Court in Washington, D.C. “The United States Department of Transportation has withdrawn the 2014 decision that (the counties) challenged. … Because there is therefore no longer a live case or controversy, DOT moves to dismiss.”

All Aboard Florida had previously signaled intent to use this tactic to the Department of Transportation in late October. The company has consistently maintained that in addition to the $600 million, it likely would request approval to sell $1.15 billion of bonds for phase two, from West Palm Beach to Orlando International Airport. The railroad needs the Florida Development Finance Corp., or a similar state board, to issue the bonds, and in court documents, All Aboard Florida has hinted  that the Finance Corp.’s 2015 decision to issue the bonds would carry over to the new financing.

Opponents, however, have challenged that assertion and asked the state board for more details. It is this sort of legal ‘jujitsu ” that raises concerns about the underlying fundamental economics of any financing that employs such tactics. In many ways it insults the intelligence of our market. By virtue of the fact that the deal faces a year-end deadline governing the issuance of private activity bonds, the effort to market such a deal between the holidays renders serious analysis of the financing virtually unachievable. So if caveat emptor ever applied to a deal in our market, this is it.


As we went to press, the City of Chicago is trying to put together the finishing pieces of a plan to increase contributions to two city worker pension systems in the hopes a bill could start to move this week in Springfield. The effort has met resistance even before arriving in Springfield. The municipal employees pension fund board resisted provisions that would have given Mayor Emanuel the power to appoint an additional trustee and put the retirement fund in line behind city bond holders for city payments. The Emanuel administration gave on both points, winning support from the municipal pension fund board. Clearly this is an issue of concern to bondholders.

Unions were also resistant to the specifics of a provision that would increase the amount newly hired government workers would have to pay toward their pensions from 8.5 percent to 11.5 percent. The concerns centered around possible changes that would allow employees to pay less than 11.5 percent if outside analysts decided less money was needed to ensure the solvency of the retirement plans. Emanuel’s office says that duty should fall to the administration, while unions, including the American Federation of State, County and Municipal Employees, say the pension funds should set that figure.

Aldermen would have to work just as long as all other city workers before getting full pension benefits. Current aldermen are able to reach full benefits in just 20 years, instead of the 30 required of city workers. Under Emanuel’s plan, city taxpayers will be contributing hundreds of millions of dollars more a year to the municipal workers’ and laborers’ pension funds. That, along with increased employee contributions, is designed to ensure the funds have 90 percent of what is owed to workers in benefits within the next 40 years.

So let’s review what the City has done that ultimately needs this pending legislation to enable.  The City Council this year approved a new tax on city water and sewer service that will top 30 percent when fully phased in over the next four years. That’s expected to raise $239 million a year. The Council also approved a $1.40 increase in the monthly emergency services fee on all cellular and landline telephones billed to city addresses to raise about $40 million a year for contribution increases to the laborers’ fund.

In addition, the Council enacted a record $543 million property tax increase for increased contributions to pension funds for police officers and firefighters, and a $250 million property tax increase at the Chicago Public Schools to increase contributions to the teachers’ pension fund. Even if state enabling legislation is passed and signed (a huge assumption given the State’s poisoned politics), the city by the early to mid-2020s will have to come up with hundreds of millions of additional dollars a year to keep up with its proposed contribution schedules to the city’s four pension funds.


“Several discrepancies have been pointed out in PREPA’s general accounting statements, which are significant numbers. Thirty- and 50-something million dollars that have an impact on the proposed rate. At the moment, PREPA has provided some explanations, but that is a resolution that the PREC will determine at the end of the  hearings, if their answer was appropriate or not and its veracity,” Such is the reaction to a request for a review of proposed increased rates for PREPA. “These are the things that could affect in determining what the final rate will be. If it is determined that PREPA’s request isn’t fair or reasonable and should be lower, then PREPA will be forced to repay its customers that rate hike that began in August this year, and should have then a retroactive reimbursement since August, when it began the temporary raise,” the PREC chief said.

The commission isn’t looking to implement an additional rate, but rather investigate whether the temporary rate increase established in August is justifiable. “I have to explain that this is an adjudicatory process and this is one of the benefits of having a regulating commission, because otherwise, Prepay would impose an increase and it couldn’t be questioned. We have to make sure the necessary revenue and the expenses Prepay will undertake the following months are just and reasonable and that is what will define a just and reasonable rate in Puerto Rico, whose base hasn’t been revised in 27 years,”.

Unfortunately, the time for adult supervision for PREPA since the law establishes a time limit for the body to issue its final determination. “Act 57 gives the PREC 180 days once a formal rate revision request is filed to evaluate it during this process, where there are interveners who represent different sectors according to their particular interests, and there is the Commission with its technical group. There were hearings some months ago of a public nature, and now what we will do is a technical and financial test of all the questions the PREC has regarding the petition. This is a very lengthy process, we have [been conducting it] for weeks and we are about to finish because the law gives us 180 days, which end in Jan. 11, 2017, so if the PREC exceeds that time it loses jurisdiction and Prepay could indiscriminately make that temporary rate permanent, which is what we must ensure, that we have all the necessary elements and criteria to make a fair determination,” said the PREC chairman.

He said the PREC will validate if the 1.299 cent hike established by Prepay is valid and reasonable in light of the evidence and testimony by interveners during the hearings. “We are in day one of 16 public hearings and there is a lot of evidence that will be presented under oath that will give more veracity to the information, and I repeat and insist, if we didn’t have it, the raise would be automatic and I think the people will notice that in the end elements that will help citizens will be revealed,” he said.


So if anyone wonders why it has been so hard for PREPA to work out a restructuring with creditors and position itself for its future capital needs, we offer this in a long line of exhibits.


The Chicago City Council this week unanimously authorized a transit tax-increment financing district in hopes of securing $1.1 billion in federal grants to modernize the CTA’s Red Line before President Barrack Obama leaves office. November 30 was literally the deadline for the city to demonstrate its commitment to providing local matching funds $622 million in local matching funds needed to access “core capacity grant.” The remaining $428 million in matching funds will come from the CTA.

The agreements and the ordinances had to be fully in effect, then has to go to Congress for 30 days before it can be approved and closed under that grant agreement. City Council approval of the transit TIF legislation took on urgency after Donald Trump defeated Democrat Hillary Clinton, the mayor’s candidate for president.

Under a normal TIF, property taxes are frozen at existing levels for 23 years. During that time, the “increment” or growth in property taxes are held in a special fund and used for specific purposes that include infrastructure, public improvements and developer subsidies. This transit TIF would remain in place for 35 years. The Chicago Public Schools would get its 50 percent share of the growth off the top. The transit TIF would get 80 percent of the rest. The remaining 20 percent would be shared by the city and other taxing bodies.

The debt service table released by the city  shows the transit TIF generating $803,251 next year, $8.4 million in 2018 and $26.9 million in 2021. The revenue would rise to $46.3 million in 2024, $67.1 million by 2027 and $113.5 million by 2033. By 2033, the total take would be $851 million.

“But over the next 35 years, all of the TIFs the city currently has in place are going to begin to roll off. All of that’s going to return increment and value to the base. So the end result of this — even with this TIF in place — is that we have a tax rate that’s lower than the tax rate we have today.”

These are grand assumptions are assumptions about ongoing reassessments over the life of the TIF which support the projections. But flawed as the plan may be, it reflects both the support for transit financing at the local level we have recently documented as well as the level of uncertainty about the commitment of the incoming regime in Washington.


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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