Muni Credit News December 11, 2014

Joseph Krist

Municipal Credit Consultant


SIFMA released the results of its Municipal Issuance Survey for 2015. The respondents expect total municipal issuance, both short- and long-term, to reach $357.5 billion in 2015, up slightly from the $348.1 billion estimated issuance in 2014.

Short-term issuance is expected to remain largely unchanged in 2015, with $42.5 billion in short-term notes expected, compared to $42.8 billion in 2014.  Long-term issuance is expected to rise in 2015, with $315.0 billion in long-term bonds expected, compared with $305.3 billion in 2014.

Long-term alternative minimum tax (AMT) issuance is projected to rise to $10 billion in 2015, a 16.7 percent increase from 2014; variable-rate demand obligation (VRDO) issuance to rise slightly to $9 billion in 2015, recovering from the record low of $6.6 billion issued in 2014.

Survey respondents offered a range of views on interest rates in the coming year. The federal funds rate is expected to rise from 0.13 percent in end-December 2014 to 0.75 percent by end-December 2015. Forecasts include: The two-year Treasury note yield is expected to rise from 0.50 percent end-December 2014 to 1.15 percent by end-December 2015; The 10-year Treasury note yield is also expected to climb from 2.4 percent end-December 2014 to 3.25 percent end-December 2015.

One of the factors cited for the projection of flat issuance is the increasing use of direct lending from banks by municipalities. This sector of municipal borrowing has been characterized by weak disclosure, making it difficult to assess the true debt burden of many municipal borrowers. There are a number of initiatives underway to improve the measurement and disclosure of this source of debt.


Legislation to increase Puerto Rico’s petroleum tax to finance a bailout of the Highways & Transportation Authority and reliquify the Government Development Bank finally squeaked through Capitol on Monday. The long, strange trip of the legislation took a surprise turn Monday night when New Progressive Party Rep. Pedro “Pellé” Santiago broke ranks with his minority delegation and voted for the bill, which passed with the minimum 26 votes needed. Santiago’s vote was decisive because Popular Democratic Party Rep. Luis Raul Torres voted against the final measure despite finally agreeing to back the bill in the first House vote last week in spite of obtaining the inclusion of multiple amendments he was pushing for.

After the vote Santiago said that “Mine was the 26th vote and I take responsibility for that,” Santiago said in a radio interview. The people elected Gov. Alejandro García Padilla in 2012 and gave him a mandate. There are two years left to deliver and I don’t want to be an obstacle in that path.”

Versions of the legislation were both passed by one-vote margins in the House of Representatives and the Senate last week as part of a special legislative session called by Gov. Alejandro García Padilla to finally get the tax hike through the legislature. The House was first to approve a substantially amended bill with the Senate following after introducing its own changes.

The House returned to work on Monday but did not concur with the Senate amendments, so a conference committee was named to hammer out a single version to send to García Padilla for signature. The conference committee version passed the Senate in a 14-12 vote along partisan lines before the surprise vote in the Senate. Left in the final version was a Senate bid that scraps an automatic hike in the petroleum tax to keep up with inflation and language to cap interest rates on issuing debt backed by the levy at 8.5 percent. Another upper chamber amendment to make the cut calls for a restructuring of the HTA.

The bulk of the House’s wording made it through, including the stipulation that the steep tax hike will take effect with a planned broader reform of the tax system in the first quarter of 2015. The bill sets a deadline for the oil tax to be implemented with the tax reform before March 15.

Puerto Rican Independence Party Sen. María de Lourdes Santiago indicated a potential court challenge to the constitutionality of the oil tax hike, as did an NPP Sen. arguing that it compels lawmakers to vote for the broader reform that has yet to be filed.

The bill will increase the petroleum excise tax from $9.25 to $15.50 a barrel. The levy had been increased from $3 just last year. Proceeds of the bond deal would be used to wipe out a $2.2 billion loan from the GDB to the HTA in light of its dwindling cash reserves.


For the second consecutive year, the fate of a P3 transportation project will be decided by a newly elected governor. Earlier this year, a Va. highway P3 project was held up by incoming Gov. Terry McAuliffe for additional review.  The Maryland Transit Administration delayed the deadline for private-sector bids on its $2.45 billion Purple Line light-rail project for two months to give newly elected Gov. Larry Hogan time to evaluate the proposed public-private partnership. Hogan, an avowed opponent of the Purple Line and the $2.9 billion Red Line rail proposal in Baltimore, defeated his Democratic opponent Lt. Gov. Anthony Brown in an upset in November by a 51.4% to 46.9% margin. Brown supported state funding for the rail projects. Hogan said during the campaign that preferred spending transportation dollars on roads rather than the rail transit projects. He said he would cancel the two rail projects but later softened the stance enough to say the Red and Purple lines are “worth considering.”

Bids from four international consortiums will be selected March 12 rather than Jan. 9 as originally scheduled. The successful consortium will invest $500 million to $900 million in the Purple Line in exchange for the concession to operate and maintain the system for 35 years. The concessionaire will receive availability payments of up to $200 million a year, which can be used to repay a federal Transportation Infrastructure Finance and Innovation Act loan of up to $732 million being sought by the state. The light rail line could be operational by 2020 if construction gets under way as scheduled in late 2015. The successful consortium will invest $500 million to $900 million in the Purple Line in exchange for the concession to operate and maintain the system for 35 years.

Maryland Transit Administration said that it did this to give the incoming administration more time to evaluate this complex project and in the meantime, is continuing with the solicitation process, right-of-way acquisitions, and agreements.” The Maryland Board of Public Works had been expected to pick the private partner in spring 2015.

In Virginia,  a comment period was recently concluded regarding the plan to build a new highway by a private consortium, US 460 Mobility Partners. In this case bonds had been issued to finance a portion of project construction which was halted pending USACE’s [United States Army Corps of Engineers] decision on a 404 environmental impact permit. This action gave US 460 Mobility Partners the right to terminate the design‐Build Agreement if work has stopped for 120 consecutive days during a waiting period. VDOT estimates that the FHWA and USACE will issue their decisions on the final SEIS and a preferred alternative by the first quarter of 2015.  At that time the 404 permit work would be restarted.  The 404 permit decision is anticipated by the second quarter of 2015.

Bondholders have been concerned that the lack of permit approval could cause VDOT to be in default under its various agreements with US 460 Mobility Partners. Should that be the case and should such a default remain uncured, the bonds would be subject to extraordinary mandatory redemption. To meet the requirements of such a call, the unspent bond proceeds, including the balance in the capitalized interest account, will be applied and the additional amount needed will be sought from VDOT as a termination payment.

So P3 projects continue to face a mixed reception for a variety of reasons with opposition coming from various angles and segments of the political spectrum. What makes these two examples unique is that the obstacles are coming from the offices of state executives rather than from local grass roots opponents which has been the more traditional source of opposition. It serves as a reminder that these projects, while innovative, require as heavy a level of investor scrutiny as do traditional public finance projects.


The CA State Controller reported  that November California revenues fell 2.3 percent short of plan for the month, although the State is 3.1 percent ahead of forecasts for the fiscal year to date. Disbursements were also 3.1 percent lower than expected, and remain 2.4 percent behind projections for the first five months of the fiscal year.

Personal income taxes were the major disappointment of November, some $260 million below estimates. Lower-than-expected paycheck withholding was the primary shortfall, in spite of national employment growing by 321,000 jobs in that month alone. Since California accounts for more than 10 percent of all jobs, the State should also post a gain when job data are released in late December. Personal income taxes were up relative to last November by 6.0 percent, or $188 million. Part of November’s shortfall could be due to timing.

Retail sales taxes, which have generally been weak this year, continue to trend below plan. Those taxes fell $103 million behind expectations for the month, and are approximately 6.0 percent behind projections for the fiscal year. In contrast, corporate taxes beat forecasts by $164 million in November.

Since July 1, total revenues are about $1.0 billion ahead of budget projections, with sizable “overshoots” by corporate and personal income taxes more than offsetting an underperformance in retail sales tax receipts. Disbursements were $237 million less than forecast during the month, and fiscal year to date, disbursements are $1.3 billion less than anticipated. Spending has been less than expected for education, disability services, and other social services.

Spending usually exceeds revenues during the first several months of the fiscal year, but this year’s gap has been significantly less than projected. Total receipts are more than $1.3 billion ahead of projections, while total disbursements are more than $1.3 billion below estimates. The difference, or the State’s increase in temporary borrowing, is $2.7 billion less than projected. The total outstanding loan balance of $18.5 billion is being financed via $15.7 billion of internal borrowing and $2.8 billion from external sources.



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