Muni Credit News December 18, 204

Joseph Krist

Municipal Credit Consultant


The omnibus appropriations bill passed by Congress included a little-noticed provision that would make it more difficult for municipalities to use eminent domain to condemn and seize underwater mortgages. The bill would ban the Federal Housing Administration from refinancing loans that have been seized via eminent domain. Language in the spending bill says it “prohibits funds for HUD financing of mortgages for properties that have been subject to eminent domain.”

Proponents of eminent domain such as San Francisco-based Mortgage Resolution Partners had planned to use FHA-insured loans to refinance loans that have been seized by municipalities and written down to their current appraised value. But so far, the use of eminent domain has been thwarted by industry groups like the Mortgage Bankers Association (MBA)and Securities Industry Financial Markets Association, which have strongly opposed Mortgage Resolution Partners’ efforts in cities like Richmond, Calif., Las Vegas and Newark, N.J.

Fannie Mae and Freddie Mac are not allowed to finance loans involved in an eminent domain takeover while  Department of Housing and Urban Development officials have declined to take a position on the issue, contending they would have to consider the circumstances when actually presented with an application to refinance a mortgage seized via local governments exercising eminent domain.

The MBA has supported a prohibition for a number of years, According to chief lobbyist for the Mortgage Bankers Association, the use of eminent domain to achieve principal reduction would have created capital market implications. Municipalities that resorted to eminent domain would have turned into “no-fly zones,” he said, where lenders would not finance new mortgages.


Last year, Rep. Randy Hultgren emerged as a major voice in Congress in support of municipal bonds. Recently he said municipal bonds should be encouraged, not limited, because state and local governments face challenges financing projects through other means. The Illinois Republican said at the Government Finance Officers Association’s winter meeting that communities have used munis to improve their infrastructure after disasters, and they haven’t necessarily had other tools to finance the projects. He noted that localities aren’t getting many funds from the federal government and their states’ governments.

Hultgren, who is on the financial services committee discussed challenges that munis face at the federal level. They include President Obama’s recent budget requests that proposed capping the value of the municipal bond tax exemption at 28%. Another challenge is tax reform. A proposal released last week by House Ways and Means Committee Chairman Dave Camp, R-Mich., would impose a 10% surtax on municipal bond interest for high earners. It also would eliminate the tax-exemption for new private-activity bonds.

Hultgren said he thinks Camp put out his plan to see what kind of pushback he would receive. It’s important for people to be vigilant and explain the importance of the tax exemption for municipal bonds, Hultgren said, because if they don’t, the exemption may be seen as a tax preference that can be easily changed in tax reform.

Hultgren said he is going to continue push for munis to be included in the definition of high-quality liquid assets in a federal banking rule that becomes effective Jan. 1. “Excluding investment-grade securities from HQLA’s definition will decrease the demand for such securities, and will hurt municipalities’ abilities to finance infrastructure projects”, he said.

He has introduced two bond-related bills in the last few months, which he likely would reintroduce the in the new Congress. One of the bills would increase the annual issuance limit for issuers of bank-qualified bonds to $30 million from $10 million. The other bill would increase the maximum size of an industrial development bond issue and would allow more types projects to be financed with these bonds.


Gov. Peter Shumlin, a long-time supporter of moving to a universal, publicly-financed health care system in Vermont, detailed this week his Administration’s health care financing report, set to be delivered to the Legislature in January. The financial models unveiled by the Governor would require both a double digit payroll tax on Vermont businesses and an up to 9.5% public premium assessment on individual Vermonters’ income to pay for Green Mountain Care, the statewide public health care system proposed in Act 48.

The Governor acknowledged that given current fiscal realities, such a financing plan would be detrimental to Vermonters, employers and the state’s economy overall. Therefore, he said, despite his steadfast support for a publicly-financed health care system, he reluctantly will not support moving forward with a financing proposal at this time or asking the Legislature to consider or pass it.

“Pushing for single payer health care when the time isn’t right and it might hurt our economy would not be good for Vermont and it would not be good for true health care reform. It could set back for years all of our hard work toward the important goal of universal, publicly-financed health care for all. I am not going undermine the hope of achieving critically important health care reforms for this state by pushing prematurely for single payer when it is not the right time for Vermont. In my judgment, now is not the right time to ask our legislature to take the step of passing a financing plan for Green Mountain Care.”

Although the Administration explored several different benefits and financing proposals, the preferred proposal outlined by the Governor’s Deputy Director of Health Care Reform Michael Costa would cover all Vermonters at a 94 actuarial value (AV), meaning it would cover 94% of total health care costs and leave the individual to pay on average the other 6% out of pocket. Lower AV proposals create significant administrative complexity and reduce disposable income for many Vermonters.

Paying for that benefit plan would require:  An 11.5% payroll tax on all Vermont businesses; a sliding scale income-based public premium on individuals of 0% to 9.5%. The public premium would top out at 9.5% for those making 400% of the federal poverty level ($102,000 for a family of four in 2017) and would be capped so no Vermonter would pay more than $27,500 per year. Even at these tax figures, the proposal would not include necessary costs for transitioning to Green Mountain Care smaller businesses, many of which do not currently offer insurance. Those transition costs would add at least $500 million to the system, the equivalent of an additional 4 points on the payroll tax or 50% increase in the income tax.


A new federal survey has found that e-cigarette use among teenagers has surpassed the use of traditional cigarettes as smoking has continued to decline. The survey, released Tuesday by the National Institute on Drug Abuse, measured drug and alcohol use this year among middle and high school students across the country. It is one of several such national surveys, and the most up-to-date.

It was the first time this survey measured e-cigarette use, so there were no comparative data on the change over time. The survey found that 17 percent of 12th graders reported using an e-cigarette in the last month, compared with 13.6 percent who reported having a traditional cigarette. Among 10th graders, the reported use of e-cigarettes was 16 percent, compared with 7 percent for cigarettes. And among eighth graders, reported e-cigarette use was 8.7 percent, compared with just 4 percent who said they had smoked a cigarette in the last month.

A 2013 youth tobacco survey by the federal Centers for Disease Control and Prevention released in November found that the share of American high school students who used e-cigarettes rose to 4.5 percent in 2013 from 2.8 percent in 2012. The share of middle school students who used e-cigarettes remained flat at 1.1 percent over the same period. Some experts said the new data suggested that the rate might have increased substantially since 2013, though it will be impossible to know for sure until the C.D.C. releases its 2014 data sometime next year.

We view anything that reduce purchases of actual cigarettes as negative for holders of tobacco securitization bonds.


Officials from water agencies in Arizona, California and Nevada signed an agreement last week to jointly add as much as three million acre-feet of water to Lake Mead by 2020, mostly through conservation and changes in water management that would reduce the amount that the states draw from the lake. The agreement, signed at the Colorado River Water Users Association’s annual conference in Las Vegas, is aimed at forestalling further drops in the level of the lake that could endanger not just the water supply for 40 million people, but also the electricity generated by dams there and upstream at Lake Powell.

Three million acre-feet, roughly what six million households use in a year, would add about 30 feet of water to a lake whose level is now just a few feet above its record low. The agreement is a stopgap solution that is unlikely to solve the long term needs of the region. Arizona, in particular, has reason for concern. In the 1960s, it bartered away its senior rights to Colorado water to get California’s support in Congress for the Central Arizona Project.

Should Lake Mead run short, Arizona’s share of water would be rationed while California would continue to receive its full allocation — a prospect that Arizonans have feared for decades. The level of Lake Mead, now about 40 percent full, is only about 10 feet above the point at which the federal government would declare a shortage and begin rationing water to downstream users. A further 25-foot drop would dry up one of two water intakes that supply 70 percent of Nevada’s population with water.

Only last week, Nevada workers completed a three-mile, $817 million tunnel into the lower reaches of Lake Mead, giving the state a steady water source should a declining lake level disable intakes at higher elevations. At the same time, the Southern Nevada Water Authority approved plans to spend $680 million to build a pumping station for the same intake — a reflection of the fact  that falling lake levels could render useless the existing pumps higher up Lake Mead’s basin.

Last week, Wyoming released the findings of research into what may be the most unusual of all the efforts to resuscitate the Colorado: cloud seeding. With financial help from Arizona, California and Nevada, Wyoming has seeded snow clouds for a decade, hoping to build a snowpack that will deliver more water to the Colorado and its tributaries in the spring.

Scientists have long been skeptical that seeding clouds with certain chemicals actually works; the National Research Council concluded in 2003 that while the process clearly changes the character of clouds, there was no proof that it produced more precipitation. But the Wyoming study found that snowfall increased by as much as 15 percent after clouds were seeded, and that the added snow increased stream flows by as much as 3.7 percent. The research found that cloud seeding could cost as little as $27 per acre-foot of water — or as much as $427 per acre-foot. But even the higher cost is lower than that of desalination, an alternative to using Colorado River water that is being considered in some states.


We will take the next two weeks off the celebrate the holidays. Our next posting will be on January 8th, 2015. Best wishes for good cheer and good health to all.


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.