Muni Credit News February 21, 2017

Joseph Krist










Classroom teachers would receive a 2-percent pay raise, highway projects including Interstate 70 in Ohio County would be finished, and motorists would pay 10 cents more per gallon of gasoline if Gov. Jim Justice’s proposed budget is enacted by the West Virginia Legislature.

The Governor calls his proposal West Virginia’s “Save Our State Budget”. The plan combines  spending cuts, tax increases and fee increases and a $123 million withdrawal from the state’s Rainy Day Fund to fund an estimated $500 million shortfall for fiscal year 2018. Justice’s relies on $450.15 million raised through a half-percent increase in the sales tax to 6.5 percent; eliminating tax exemptions for professional services and advertising and raising the gasoline excise tax by 10 cents a gallon from the current 20.5 cents to 30.5 cents. The proposed general fund budget would increase to about $4.8 billion, with total spending, including federal and other funds, at $12.9 billion.

During his State of the State speech, Justice dramatically advocated for the proposed tax increases. “I truly, from the bottom of my heart, hate tax increases,” he said, adding it’s “the most painless way I think you can get out of this mess. If you don’t do this, you’re dead. You’re dead beyond belief.” All of the proposed tax increases wouldn’t be permanent. After three years, he proposes eliminating the sales tax as well as a proposed 0.2-percent commercial activities tax he wants businesses to pay. Justice’s proposal emphasizes a “bold and aggressive” $1.4 billion road program that shows Justice’s commitment to long-term economic growth according to state budget officials. In addition, Justice proposes a $105 million Save Our State Fund, to be used for economic development and infrastructure investment.

The roads program “will invest heavily in roads and bridges,” and is expected to create up to 25,000 new jobs throughout the state, including temporary jobs, according to the administration. Among the projects listed in the $1.4 billion Phase I of the program — the phase that lists projects that have passed most requirements and are ready to go — is the $135 million I-70 bridge rehabilitation and replacement project in Ohio County. The $1.5 billion Phase II includes W.Va. 2 widening projects in Hancock, Marshall and Wetzel counties. Those include a $10.5 million Hancock County project that widens it through New Cumberland; an $80 million project in Wetzel County from Proctor to Kent; and creates four lanes through Marshall County.

Justice called his plan for $26.6 million in cuts as “responsible cuts,” stating alternatives could cost the state 3,000 jobs, in addition to cuts that could have eliminated all state parks and shut down dog and horse tracks, and veterans’ services. The planned cuts include eliminating the eight, regional education service agencies (RSEA) that provide services to public schools and cost the state more than $3.5 million per year. The services RESAs provide include training bus drivers, and hiring special needs teachers, and managing substitute teacher schedules.


The City of Atlantic City has settled a long standing major tax-appeal debt owed to the Borgata Hotel, Casino & Spa. The state says the city agreed to accept less than half of the $165 million owed it. The settlement was reached by overseers appointed by Gov. Christie under a law that placed control of Atlantic City under the oversight of the state Department of Community Affairs. The announcement came from the state, which headlined its release, “Christie Administration and Borgata Reach Settlement Agreement.”

The state said Borgata agreed to accept $72 million to cover all judgments and claims for 2009 to 2015. The settlement precludes Borgata from pursuing tax appeals for 2013 to 2015. Borgata also agreed to make payments under the Payment in Lieu of Taxes program that applies to the city’s casinos beginning this year, the statement said. Previous efforts overseen by state monitors, an Atlantic County Superior Court judge, and the city itself had failed to resolve the debt.

The latest negotiations were conducted with the involvement of the state’s new overseer. Christie had made settlement of the Borgata deal a priority of past emergency managers appointed by the state, but blamed the city for the lack of a settlement before now. “This settlement has been one of my administration’s priorities since Atlantic City’s fiscal crisis forced us to assume control of operations there in November,” Christie said in a statement. “The city administration, despite all the time and opportunity given to them, failed to accomplish the goal, as they have with so many others.” Christie noted that the $72 million was $30 million less than what the city had proposed  in its own five-year recovery plan, which was rejected by the state.

Changes in the ownership of the Borgata may have been as much of a factor in the settlement as anything else. Borgata is run by MGM Resorts International, which took sole control of the property from its partner Boyd Gaming last August. MGM paid up for full control — $900 million for half of the property — even as the judgment from the tax appeals had reduced Borgata’s total assessed value to about $800 million. MGM is seen as wanting to pursue further development in Atlantic City or North Jersey.

It is not clear how the city would finance the $72 million. Other tax settlements with casinos were funded through bond payments. The city had proposed selling its municipal airstrip, Bader Field, to its Municipal Water Authority to help pay off debts, but that plan was rejected by the state.


A U.S. District Court Judge denied the commonwealth’s motion to stay a lawsuit filed by general obligation (GO) bondholders and a motion to intervene presented by senior Sales Tax Financing Corp. (Cofina) bondholders. Motions were granted allowing intervention by the Financial Oversight and Management Board; Ambac Assurance Corp., which insures $800 million in Cofina funds; the Puerto Rico Funds and by major Cofina bondholders.

The judge said that “this is not an action to recover a liability claim against the government of Puerto Rico that arose before the enactment of Promesa because the GO Bondholders seek only declaratory and injunctive relief.” The ruling was made as part of the Lex Claims case, a lawsuit filed by GO bondholders against the island’s governor, Treasury secretary and director of the Office of Management Budget, as well as the Bank of New York Mellon Corp. That suit was amended to include Cofina and its executive director.

The GO bondholders are hoping to stop the government from diverting the sales and use tax to pay Cofina bondholders. The GO creditors say their bonds are guaranteed by the commonwealth’s full faith and credit and taxing power and have payment priority over Cofina. This would be based on their belief that the constitutional clawback that supports GO debt  supersedes legislative dedication of sales tax revenues to the COFINA debt.

The judge ruled on six motions: (1) the Commonwealth and Cofina defendants’ motion to stay the action in its entirety pursuant to section 405 of Promesa; (2) the fiscal oversight board’s motion to intervene pursuant to Promesa; (3) Ambac Assurance’s motion to intervene as a defendant pursuant and to stay the action pursuant to Promesa; (4) the Cofina senior bondholders motion to intervene; the Puerto Rico-based funds’ motion to intervene; and (6) the major Cofina bondholders’ motion to intervene.

The GO bondholders’ complaint challenged the government’s moratorium order that diverted funds to pay services, the commonwealth’s failure to allocate funds for future GO obligations, and legislation diverting funds to the Government Development Bank. The complaint alleges the commonwealth and Cofina defendants have deprived them “of rights, privileges, and immunities secured by the laws of the United States.”

The judge’s decision to allow the fiscal board, Ambac, Puerto Rico Funds and major Cofina bondholders to intervene because “the Court is required to grant a party’s motion to intervene if that party has demonstrated that: (1) its motion is timely; (2) it has an interest relating to the property or transaction that forms the foundation of the ongoing action; (3) the disposition of the action threatens to impair or impede its ability to protect this interest; and that (4) no existing party adequately represents its interest.”


House Republican leaders presented their rank-and-file members with the outlines of their plan to replace the Affordable Care Act, leaning heavily on tax credits to finance individual insurance purchases and sharply reducing federal payments to the 31 states that have expanded Medicaid eligibility. The talking points they provided did not say how the legislation would be paid for, essentially laying out the benefits without the more controversial costs. It also included no estimates of the number of people who would gain or lose insurance under the plan, nor did it include comparisons with the Affordable Care Act, which has extended coverage to 20 million people.

It purports to lower costs, expands access, improves quality, and puts patients and families in charge of their care, while protecting patients with pre-existing conditions and ensuring dependents up to age 26 can stay on their parents’ insurance. To lower the cost of healthcare, Republicans would eliminate all the Obamacare tax increases, including: The tax on health insurance premiums; The medicine cabinet tax; The tax on prescription drugs; The tax on medical devices; the increased expense threshold for deducting medical expenses. It would provide additional assistance for younger Americans and reduce the over-subsidization older Americans are receiving.

The legislation creates a new code section – 36C— to do this. The credit is: Under current law, in 2017, the maximum amount that can be contributed (both employer and individual contributions) to an HSA  is $3,400 for self and $6,750 for a family. H.R. 1270 (114th Congress) and A Better Way significantly increase the contribution limits by allowing contributions to an HSA to equal  the maximum out of pocket amounts allowed by law. For 2017, those amounts are $6,550 for self-only coverage and $13,100 for family coverage.

H.R. 1270 and A Better Way provide that if both spouses of a married couple are eligible for catch-up contributions and either has family coverage, the annual contribution limit that can be divided between them includes both catch-up contribution amounts. Thus, for example, they can agree that their combined catch-up contribution amount is allocated to one spouse to be contributed to that spouse’s HSA. In other cases, as under present law, a spouse’s catch-up contribution amount is not eligible for division between the spouses; the catch-up contribution must be made to the HSA of that spouse.

H.R. 1270 and A Better Way provide that, if an HSA is established during the 60-day period beginning on the date that an individual’s coverage under a high deductible health plan begins, then the HSA is treated as having been established on the date that such coverage begins for purposes of determining if an expense incurred is a qualified medical expense. Thus, if a taxpayer establishes an HSA within 60 days of the date that the taxpayer’s coverage under a high deductible health plan begins, any distribution from an HSA used as a payment for  a medical expense incurred during that 60-day period after the high deductible health   plan coverage began is excludible from gross income as a payment used for a qualified medical expense even though the expense was incurred before the date that the HSA was established.

Here is the bad news for state credits and for hospitals. Obamacare’s Medicaid expansion for able-bodied adults enrollees would be repealed in its current form. States that chose to expand their Medicaid programs under Obamacare could continue to receive enhanced federal payments for currently enrolled beneficiaries for a limited period of time. However, after a date certain, if states choose to keep their Medicaid programs open to new enrollees in the expansion population, states would be reimbursed at their traditional match rates for these beneficiaries.

States would also have the choice to receive federal Medicaid funding in the form of a block grant or global waiver. Block grant funding would be determined using a base year and would assume that states transition individuals currently enrolled in the Medicaid expansion out of the expansion population into other coverage. States would have flexibility in how Medicaid funds are spent, but would be required to provide required services to the most vulnerable elderly and disabled individuals who are mandatory populations under current  law. Block grants are intended to provide less money. The rest of the discussion about flexibility etc. is just cover for lower funding.

The plan relies on “high risk pools”. Before Obamacare, 34 states had high risk pools. Building on the idea of high risk pools, A Better Way envisions new and innovative State Innovation Grants. But instead of being tied to a separate pooling mechanism, these resources would give states sole flexibility to help lower the cost of care for some of their most vulnerable  patients. Some may suggest State Innovation Grants would lead to enrollment caps or waiting lists – like certain high risk pools functioned prior to Obamacare. There is a reason they were eliminated under the ACA as well as its progenitor in Massachusetts under then Gov. Mitt Romney.

What is most notable about this set of talking points is an almost complete absence of any discussion of how the federal government would pay for this. Like many of Paul Ryan’s efforts over the years, the plan seems to be detailed and thought out but in reality is full of platitudes and short on operational substance. This is what should be of concern to state governments, consumers, providers, and investors.


Recently we were interviewed by the Daily Bond Buyer on the issue of the potential impact of a trade war on municipal credits. The primary items of concern were the major West Coast ports and municipalities on the border with Mexico. The issue comes up as the result of comments made over the course of the campaign and since by President Trump. Here is what we said.

We said that we view a potential trade war with China as more of an economic event than a credit event, but acknowledged that the impact on West Coast ports could be notable. I mentioned the Alameda Corridor Transportation Authority, which operates a bond-financed rail line from the ports of Long Beach and Los Angeles 20 miles north to downtown Los Angeles, carrying containers from dockside to the yards of the freight railroads that send them onwards.

“Obviously they have grown and benefited from trade with China as you go up and down the West Coast,” we said of the ports. “There would be kind of the obvious ramifications for those ports, in terms of lower volumes and lower revenues.” Its revenues are volume-dependent as are some small tax-allocated land deals for warehouse facilities that could be vulnerable to an extended trade slowdown.

We mentioned that “Seattle and Oakland both benefit from the mitigating factor that they also include airports that account for major chunks of their revenue. This somewhat insulates them from the risks associated with a decline in container volume.”

The border cities would be impacted by the impact on property values, employment, and incomes because so much economic activity revolves around warehousing activity associated with NAFTA. The mayor of Nogales, AZ has worried that the impact could be to the tune of a 50% decline in those items should tariffs be imposed sufficient to adversely affect trade.

In southern California, the LAEDC estimates that 1 out of 15 jobs is related to trade coming through the Ports of Long Beach and Los Angeles. That is one example of why the overall economic impact could be greater than the direct credit impact. Either way the impact of a trade war would be negative. Even if our trade strategy is based on a border adjustment tax, there are many scenarios where the impact would not be as neutral as its proponents believes, the. In those instances the net impact on economic activity in terms of the movement of goods would be negative for the American side of the equation.

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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