Muni Credit News February 7, 2017

Joseph Krist

Municipal Credit Consultant










It isn’t often that the rating agencies overtly disagree with each other. There are clear cases where they issue disparate ratings on the same credit, but they rarely issue a report which clearly highlights the disagreement. That changed last week when Fitch Ratings in a report openly criticized Moody’s Investors Services’ recent assessment of Chicago Public Schools’ new credit structure and the legal options available to ease its distress. The report’s title “Fitch Disagrees With Moody’s Legal Analysis On Chicago Public Schools” couldn’t be clearer.

Moody’s published special credit profile reports on Jan. 12 about the city and CPS. Moody’s had not been asked to rate new deals by either issuer, but maintains junk ratings on their older debt. Fitch is pretty clear about the disagreement being more than just a difference in opinion. “We read it and we didn’t feel all the information was correct and felt it would helpful to the market if we posed our reasons as to why we disagreed,” said the report’s co-author, Amy Laskey, a Fitch managing director.

“Our goal is to clearly articulate an opinion, and often that means openly disagreeing with other market participants. We may publish those comments if there is strong investor interest, or if we feel our view is meaningfully different from another,” said Fitch’s global head of corporate communications.

Fitch assigned an A rating based on confidence in the issue’s bankruptcy-remote structure. Fitch’s  ‘A’ rating on the dedicated CIT bonds is based on a dedicated tax analysis without regard to the board’s financial operations. Fitch has been provided with legal opinions by board counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues’ under Section 902(2)(e) of the U.S. Bankruptcy Code in the event of a board bankruptcy.

At the time of the sale of bonds under this security in December, there was widespread disagreement in the market as to whether or not the pledged revenues constituted special revenues in a bankruptcy. The distinction is important as special revenue secured debt is usually paid in a Chapter 9 where general tax backed debt may not be paid.

Moody’s argument is based on its belief that the most likely scenario for CPS is that the district will levy for debt service on GO alternate revenue bonds in order to free up state aid for operations.” Moody’s suggests that triggering the ad valorem tax pledge used on most of its $6 billion of debt offered one option for CPS to free up revenue for operations.

The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations. Moody’s report suggests that the district could elect to use unrestricted general state aid for operations instead of debt service on its alternate bonds issued under the Illinois Local Government Debt Reform Act. Under the state’s alternate revenue structure, an ad valorem tax levy is imposed to repay bonds but it is typically abated as the “alternate” revenues are tapped. About $373 million in CPS state aid will go to such bond repayments this year.

Fitch takes the view that to apply alternate revenues to operations would draw a successful challenge in litigation opposing an attempt to levy taxes while alternate revenues were available for debt service.”  Fitch argues that the act establishing the revenues “clearly” indicates that CPS must apply available alternate revenues to debt service. “Fitch also does not agree that the CIT bonds are secured by a statutory lien.”

Under the flow of funds, the CIT revenues are collected by the county collectors of Cook and DuPage Counties. The board has directed the collectors to transmit the CIT revenues directly to an escrow agent. The escrow agent transfers revenues needed for payment of debt service to the bond trustee daily. Revenues in excess of those required to meet annual debt service may be available to reimburse CPS for authorized capital expenditures.

The board covenants not to revoke the direction to the county collectors as long as the bonds are outstanding. Based upon review of bond counsel opinions Fitch believes that any future attempt to revoke the direction to the county collectors would be contrary to state statute. This creates an effective “lockbox” structure to protect the revenues. Moody’s had written that features like a “lockbox” on revenues helped “lessen but do not eliminate the risk of bondholder impairment in a future bankruptcy.”

Fitch does not agree that the CIT bonds are secured by a statutory lien. Fitch’s belief that the bonds would be protected in Chapter 9 stems from opinions that they meet the bankruptcy code’s designation of “pledged special revenues” which offers some insulation from impairment. The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations.

CPS asked only Fitch and Kroll Bond Rating Agency to review the bonds backed by the distinct property taxes pledged. Kroll assigned its BBB rating in line with its GO ratings of BBB and BBB-minus. Fitch rates CPS GO debt B-plus, with a stable outlook. The other two rating agencies also rate CPS GOs at junk. Our experience teaches that reliance on opinion of counsel rather than established court precedent through either outstanding litigation or a record established through a bond validation proceeding should be of little comfort. Under those circumstances, the most conservative view of the credit should prevail.


With so much focus on the City of Detroit and its efforts at recovery from bankruptcy, it is easy to overlook developments in surrounding Wayne County. So we draw attention to the news that Moody’s Investors Service has upgraded the rating of Wayne County, MI’s outstanding general obligation limited tax (GOLT) bonds to Ba1 from Ba2. The Ba1 rating is the same as Moody’s internal assessment of Wayne County’s hypothetical general obligation unlimited tax rating. The lack of notching reflects the full faith and credit nature of the county’s GOLT pledge and the availability of all general operating revenue to pay debt service. Moody’s has also upgraded to Ba1 from Ba2 the rating on outstanding lease revenue bonds issued by the Wayne County Building Authority. The county is the ultimate obligor of outstanding building authority bonds, with repayment similarly secured by the county’s full faith and credit pledge and not subject to annual appropriation.

Wayne County’s GOLT bonds are secured by its pledge and authority to levy property taxes within statutory and constitutional limitations to pay debt service. Debt service is not secured by a dedicated tax levy. Bonds issued by the Wayne County Building Authority are secured by lease payments made to the authority by the county. The lease payments are secured by the county’s full faith and credit pledge, equivalent to its pledge on GOLT bonds, and are not subject to appropriation.

The stable outlook reflects the likelihood of credit stability given an improved balance sheet and financial position that mitigate challenges associated with a weak economic profile, negative demographic trends and outstanding borrowing needs.


It’s the kind of move that makes one wonder if legislators understand the seriousness of the pension funding crisis. In a strict party-line vote, the Connecticut General Assembly approved a pension refinancing that was negotiated by Governor Dannel Malloy’s administration last year. House Democrats narrowly approved it, and then, for the first time in 2017, Lieutenant Governor Nancy Wyman broke a 17-17 tie between Democrats and Republicans in the State Senate.

Earlier in the day, Republicans seriously considered derailing the pension agreement, due to their objections that the refinancing plan wasn’t comprehensive enough. The agreement had been announced on Dec. 9, 2016. It took the prudent step to lower expected investment returns for state employees and reduced annual state payments to the fund. It also aimed to restructure a projected $6 billion balloon payment in 2032, that state analysts have described as a kind of fiscal cliff for Connecticut.

The level of debate is concerning and illustrates why the market is concerned about the State’s long term credit. The Republican President Pro Tem asked, “What’s the rush? This bill hits in 2032.” We can take time, look at different ways.” He was looking for additional union concessions paired with refinancing . He claimed not to have received information regarding the agreement until last week (yes, the deal announced two months ago), as the deal passed a committee with Republican and Democrat votes.

Fasano said if the main goal was to free up money with reduced pension payments in order to the balance the budget, then that was an irresponsible choice. “I don’t think that’s a good plan for the state. I don’t think it’s a good plan for the union employees because that money should go into the union. That money should go into the coffers and grow.” So if it shouldn’t balance the budget and improve the likelihood of pensions being paid, it’s a bad idea?

We are not holding our breath for an upgrade.


And so it goes in the effort by the state to manage the city’s finances. An Atlantic County Superior Court Judge issued a restraining order against the state after International Association of Fire Fighters Local 198 re-filed a lawsuit last week  to avoid layoffs, a new work schedule and deep cuts to benefits. The state’s attorney said in a letter that  layoffs wouldn’t be implemented until September, when a federal grant covering 85 firefighters expires. The order also temporarily blocks state officials from taking any unilateral actions against the union under the so-called takeover law.

The state planned to implement changes to the union’s contract Feb. 19, including new salary guides, elimination of education and terminal leave pay, and establishment of a new work schedule under which all firefighters would work one 24-hour shift followed by two days off. State officials claim the judge’s decision doesn’t change the state’s timeline to implement the contract changes. “We decided to delay implementing the proposed contract reforms until Feb. 19 as a good faith gesture to give the fire department more time to prepare,” said the Department of Community Affairs.

“So, the TRO, in effect, is restraining us until Feb. 13 from implementing any changes, which we already stated we won’t start implementing until Feb. 19,” Ryan said. The union lawsuit claims the state takeover law is unconstitutional since it impairs the contract rights of the union, among other reasons. It ultimately seeks a permanent injunction prohibiting the state from using its takeover powers against the firefighters.

A hearing was scheduled at Atlantic County Civil Court in Atlantic City. But the case has since been removed to federal court, Ryan said. The union wanted to keep the case in state court in the belief the contract clause of the state constitution is stronger than that of the federal constitution. The union withdrew its initial lawsuit Wednesday after the state postponed contract changes for two weeks.

The city has a $100 million budget gap. The state’s proposed Fire Department changes would save the city less than $8 million annually, according to the union’s suit. The fire union argues that proposed cuts would make the city unsafe. And it says fire department costs make up just 7 percent of the city’s $240 million budget. The potential 100 layoffs would cut nearly half of the department’s 225 firefighters.  “The 44 percent (staff) reduction could lead either to understaffed responses to high rise fires, or inadequate responses to other smaller fires while high rise fires are being fought,” the union’s suit said.


Tennessee Gov. Bill Haslam unveiled a $37 billion annual spending plan, urging lawmakers to adopt his recommended gas tax increases to pay for better roads and reject temptations to dodge it by turning to burgeoning revenues in other non-transportation areas to fund it instead. He proposed a 7-cent-per-gallon increase in gas and 12-cent boost on diesel. If adopted, the governor’s recommendations would include Tennessee’s first fuel tax increases in nearly 28 years. Lawmakers, he warned, shouldn’t be tempted to use one-time money on road funding.

“I have never thought that it was a good plan to pay for a long-term need like $10.5 billion in approved and needed road projects with a short-term surplus,” Haslam said of his plan to address a nearly 1,000-project backlog. “Third, and the most fundamental, in my proposal — an estimated half or more of the increased revenue — would come from non-Tennesseans and trucking companies” under his gas tax increase plan. his $278.5 million tax increase plan, which would also increase fees for vehicle registration, implement the first time indexing fuel prices once every year with caps to inflation and other measures.

Offsets to the fuel tax increases include cutting the 5 percent sales tax on groceries by a half percentage point, or $55 million, a $113 million cut in business franchise taxes for manufacturers whose operations generate well-paying jobs, and accelerating the current phase-out of an income tax on individuals’ investments, which will cost the state $102 million annually.


The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Phoenix-based Lawson Financial Corporation, Inc. (LFC) from FINRA membership, and has barred LFC’s CEO and President Robert Lawson from the securities industry for committing securities fraud when they sold millions of dollars of municipal revenue bonds to LFC customers.

The bonds at issue were underwritten by LFC and related to an Arizona charter school and two assisted living facilities in Alabama (which were the borrowers on the bonds). FINRA found that Robert Lawson and LFC were aware that each borrower faced financial difficulties, and Lawson transferred millions of dollars to the borrowers and associated parties from a deceased customer’s trust account, in order to hide the borrowers’ financial condition and to hide the risks associated with the bonds.  FINRA determined that when LFC customers purchased the bonds, LFC and Lawson hid the material fact that Lawson was improperly transferring millions of dollars from the trust account to various parties when the borrowers were not able to pay their operating expenses or required interest payments on the bonds.

FINRA found that Lawson and his wife, Pamela Lawson (LFC’s Chief Operating Officer), who were co-trustees of the trust account, violated FINRA rules by breaching their fiduciary duties as trustees and engaging in self-dealing with the trust account.  FINRA also determined that Robert Lawson misused customer funds. In addition to expelling LFC and barring Robert Lawson, FINRA suspended Pamela Lawson from associating with any FINRA member firm for two years and fined her $30,000 to be paid prior to her return to the securities industry. This disciplinary action settles a May 2016 complaint filed against LFC, Robert Lawson, and Pamela Lawson.

In settling this matter, LFC, Robert Lawson and Pamela Lawson neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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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