Muni Credit News December 20, 2016

Joseph Krist

Municipal Credit Consultant

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We close the year with updates on the status of major projects and issues which we have covered over the course of 2016. Our next edition will post on January 3, 2017.

STADIUM NEWS

N.F.L. owners have indicated their support for allowing the San Diego Chargers to move to Los Angeles and the Oakland Raiders to leave for Las Vegas, with plans for stadiums in the teams’ current cities having all but vanished. The potential relocations dominated discussion publicly and behind closed doors at a league meeting as momentum grew for the teams to make the moves. They would represent the most significant reordering of the N.F.L.’s geographic lineup in two decades.

The only thing left is for the Chargers to decide next month whether to exercise their option to leave for Los Angeles and for the Raiders to submit a formal proposal to relocate to Las Vegas. Nevada lawmakers have promised to contribute $750 million toward a stadium. Although the league has said it prefers teams to remain in their home markets, a growing number of owners acknowledged that the Raiders and the Chargers might end up playing in new cities as soon as next season. The Chargers have until Jan. 15 to decide whether they want to join the Rams or stay in San Diego.

The owner of the Indianapolis Colts, Jim Irsay said there was “no reason for optimism” that the Chargers and the Raiders would find a solution allowing them to stay put. In San Diego. Irsay said, “everything has been done that could be done” to get a new stadium. The owners smoothed the road for the Chargers to move when they approved a proposal to let the team raise $325 million to pay for half of the $650 million relocation fee that would be required for it to move to Los Angeles. Teams are ordinarily prohibited from having more than $250 million in debt under league rules.

The owners also approved a lease between the Chargers and the Rams — who are now building a stadium in Inglewood, Calif. — in the event the Chargers elect to move. The owner Dean Spanos of the Chargers said that he would announce whether he was moving the team after the regular season ended on New Year’s Day. Spanos has been unhappy with Qualcomm Stadium, one of the oldest stadiums in the league. A ballot measure that would have let the Chargers build a stadium in downtown San Diego with hundreds of millions of dollars in taxpayer money was soundly defeated in November.

The executive who oversees relocation efforts for the N.F.L., said the owners could give the Chargers an extra year to decide whether they wanted to move to Los Angeles, to give them more time to negotiate a stadium deal in San Diego.

The Raiders appear committed to moving to Nevada, where state lawmakers approved a new hotel bed tax that would contribute $750 million toward construction of a domed stadium in Las Vegas. The Raiders have not applied to relocate, however, and the owners were told that an application would not be filed until the Raiders’ season ended. With their best record in years, the Raiders are likely to play in the postseason. If they make it to the Super Bowl, their season will extend into February.

In an effort to keep the team from moving, the Oakland City Council on Tuesday gave the Fortress Group exclusive rights to negotiate a stadium deal on behalf of the city and Alameda County. The investment group has yet to produce a stadium proposal for the Raiders to consider.

BULLET TRAIN

California’s bullet train plan is the state’s biggest public works project. If all goes to plan, the $64 billion rail line would carry passengers between San Francisco and Los Angeles in 2 hours 40 minutes. Other rides would make stops in the Silicon and Central Valleys. Currently, construction is happening in the Central Valley with three construction contracts awarded and executed to build the first 119 miles of the system. Completion however, will not occur in the near future. A segment between San Jose and a station near Bakersfield is expected to begin operating in 2025. The target date for the San Francisco-Los Angeles line isn’t until 2029.

The funding is coming from a mix of federal grants through the American Recovery and Reinvestment Act, California Proposition 1A funds (which are bonds that were voter approved), and cap-and-trade proceeds. Unexpectedly, there has been a reduction in overall capital costs from $67.6 billion to $64.2 billion and this trend may continue.

TAPPAN ZEE BRIDGE

The New NY Bridge, as the Tappan Zee replacement is known, has reached a major milestone with the topping off of the eight main span towers, and with the final concrete pour completed this week. The New NY Bridge is on track to meet its scheduled opening in 2018 and is on budget at $3.98 billion. Additionally, 90 percent of support structures on the project are installed, including the fabrication and placement of 126 steel girders sections. To date, 3,000 roadway panels have been installed to connect the Rockland and Westchester shorelines up to the main span, taking one of the largest active bridge projects in the nation one step closer to completion.

STATE PRISON TRENDS

The Sentencing Project recently observed that since 2011, at least 22 states have closed or announced closures for 92 state prisons and juvenile facilities, resulting in the elimination of over 48,000 state prison beds and an estimated cost savings of over $333 million. The opportunity to downsize prison bed space has been brought about by declines in state prison pop­ulations as well as increasing challenges of managing older facilities. Reduced capacity has created the opportunity to repurpose closed prisons for a range of uses outside of the correctional system, including a movie studio, a distillery, and urban redevelopment.

In Manhattan, the Osborne Association, a non­profit organization, is working to convert a closed women’s prison into a space that provides services to women leaving incarceration. An entrepreneur in California purchased a closed correctional facility and plans to repurpose it as a medical marijuana cultivation center. At least four states – Missouri, Ohio, Pennsylvania, and West Virginia – have con­verted closed prisons into tourist destinations which are open to visitors and even host Halloween events.  Some prisons have closed following the termination of a contract due to prison population declines or other factors. In recent years states like Colorado, Mississippi, Kentucky, and Texas have closed pri­vately owned or managed prisons.

During 2016, our readers will recall that the Department of Justice announced plans to phase out the use of private for-profit prisons to house persons convicted of federal offenses. The Obama administration cited declines in the federal prison population as one reason for-profit contracts could be phased out. As of 2016, BOP maintained con­tracts with 13 private prisons. Illinois officials sold the closed Thomson Correctional Cen­ter to the overcrowded federal Bureau of Prisons for $165 million to house persons convicted of federal offenses. States like Michigan have continued to manage previously closed prisons. In 2012, Michi­gan officials reopened the Muskegon Correctional Facility which had closed in 2010; Pennsylvania prisoners were incarcerated there during 2011.

AMERICAN DREAM MALL

On its third developer since 2003, the mall, which started out as Xanadu and along the way became American Dream, is now slated to open in fall 2018, the developer, Triple Five Group, says. After an eight-month hiatus, hundreds of construction workers are back at work on the site. The developers had planned to sell more than $1 billion worth of tax-free bonds in September to help pay for the project, but the offering was delayed by a lawsuit. By the time a judge had decided in Triple Five’s favor, interest rates had started climbing after Mr. Trump’s victory, and investor appetite for bonds cooled as rates rose.

The developer says that the company had leased 70 percent of the 2.9 million square feet available at American Dream. The company, which has already poured $700 million into the project, is now spending roughly $1 million a day on construction. On top of the $1.9 billion already spent, Triple Five is still planning to sell $1.15 billion in high-yield bonds to finish the project. The company is also seeking $1.5 billion in bank loans. The project’s subsequent delays and setbacks, as well as the likelihood that American Dream now wouldn’t open until after he leaves office in early 2018,  led Governor Christie to say it was no longer a “front-burner” issue for his administration.

TAX EXEMPTION GETS SURPRISING SUPPORT

Leadership from the U.S. Conference of Mayors had a meeting with the president-elect at Trump Tower last Thursday and expressed surprise with his reaction when they pressed Trump to keep the exemptions. “He’s the president-elect, and he said he would keep it,” said Tom Cochran, the CEO and executive director of the U.S. Conference of Mayors. “My lobbyist has been up on the Hill, and they said to us everything is on the table. We didn’t know what would happen. “He definitely said he would keep the exemptions,” said Steve Benjamin, the Democratic mayor of Columbia, S.C.

We’ll see. It would be a welcome development for our market. We have to keep in mind that almost simultaneously his son in law was touting the tax credit based “infrastructure” plan which has been widely discussed. Our attitude is to wait and see until we see what actually “infrastructure” means going forward. Is it what have historically considered as public goods or is it the development of facilities for the commercial benefit and profit of private entities?

PUERTO RICO

We would have to include a final discussion of Puerto Rico in light of recent actions and comments. The Financial Oversight & Management Board told the Gov. Alejandro García Padilla administration to redo its proposed 10-year fiscal plan by removing additional federal funds from the plan that Puerto Rico was hoping to receive, which are deemed uncertain, particularly in a Donald Trump presidential administration.

Business entities on the island expressed their view. “The Puerto Rico Manufacturers Association [PRMA] does not support any policy that establishes debt restructuring as the primary issue. We support all initiatives aimed at government austerity and financial transparency, clarifying that we must defend all private and public jobs and we do not support any efforts to downsize government that may have a negative impact on our weak economy and very fragile labor market. Efforts must be made toward the consolidation of agencies, functions and services through budgetary austerity measures and other efforts toward governmental efficiency. However, retraining government employees should be a priority,” said PRMA President Rodrigo Masses.

David Skeel, is a board member who recently put in writing his views. They include the idea that creditors should recover as much as reasonably possible, while government agencies should get cuts. Skeel, a lawyer, said creditors must be protected from “unfair discrimination” and “best interests” in order to avoid another Detroit scenario. “The rule of law took a beating in the Detroit bankruptcy. Creditors who held that city’s GO [general obligation] bonds, which had the same priority as pensions, received only about 41% of what they were owed, and several classes of creditors that voted against the plan received far less. Pensioners, meanwhile, received 60% [to] 70%.”

He believes that Congress should explicitly require that recovery rates for creditors with the same priority cannot deviate more than a specified amount, such as 15% or 20%, as this would be a way to “discriminate fairly.” Additionally, he said a restructuring plan should guarantee as much recovery for creditors as is reasonably possible, as opposed to the “something’s better than nothing” ruling handed down in Detroit. Skeel also said any restructuring should address the obvious governance dysfunction that is frequently a primary cause of fiscal distress.

“Puerto Rico exemplifies this dysfunction, as about 120 government agencies provide services on the island with insufficient centralization to avoid overlap and to coordinate responsibilities. A plan that fails to eliminate or consolidate government agencies should be rejected as not feasible,” he stated.

The view that debts should be paid and that government be more efficient are ones which we are comfortable supporting.

CHRISTMAS GREETINGS

Although cultural issues are not the regular fare of this newsletter, we do make an occasional musical or movie reference as we express our views over the course of the year. So we note the announcement last week of the passing of Emerson, Lake, and Palmer guitarist and vocalist Greg Lake. Mr. Lake authored an enduring song for this season which gets great play on classic rock radio at this time of year. “I Believe In Father Christmas” contains a verse which richly summarizes our wish for our loyal and growing readership as we publish our last edition of 2016.

I wish you a hopeful Christmas,

I wish you a brave new year,

All anguish, pain, and sadness,

Leave your heart and let your road be clear.

Merry Christmas and Happy New Year from the MuniCreditNews and our partners at Court Street Group Research.

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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