Muni Credit News January 10, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

TUITION FREE SUNY?

PENSION CHANGES

PORT AUTHORITY OF NY/NJ

PROMINENT NUCLEAR PLANTS SLATED FOR CLOSURE

TBTA COMING TO MARKET

PR EXTENSION REQUEST

_____________________________________________________________________________

The administration of Gov. Andrew M. Cuomo indicated that it is ready to move ahead with a proposal to cover tuition costs at state colleges for hundreds of thousands of middle-and low-income New Yorkers. Under the governor’s plan, college students who have been accepted to a state or city university in New York (this includes two-year community colleges) would be eligible, provided they or their family earn $125,000 or less a year.

A plan like that would reflect proposals made during the 2016 Democratic primary by Senator Bernie Sanders of Vermont. If the proposal goes forward, it would establish New York at the forefront of such efforts; Tennessee and Oregon have programs to cover the costs of community college. The governor’s plan would include four-year schools, including dozens of campuses that are part of the state university system, as well as the city’s university system. CUNY was originally a free system.

Under the proposal, the state would complete students’ tuition payments by supplementing existing state and federal grant programs — essentially covering the balance, though administration officials said some students could have their entire four-year education covered. Mr. Cuomo hopes for enactment in the upcoming FY 2018 budget for his idea, with a three-year rollout beginning in the fall, with a $100,000 income limit, rising to $125,000 by 2019.

Initial estimates provided by the administration said the program would allow nearly a million New York families with college-age children, or independent adults, to qualify. The actual number of students receiving tuition-free education would probably be about 200,000 by the time it was fully enacted in 2019, according to the director of state operations. The administration estimated that the state’s annual budget outlay would be $163 million by 2019, though it acknowledged that estimate could be affected by participation and level of need. Costs for the state could also rise as enrollment rises. Some 400,000 students attend state or city universities full time, but the administration projects that the lure of a tuition-free system could increase the student population by 10 percent by 2019.

At present, New York offers in-state students one of the lowest tuition rates in the nation. Current full-time tuition at four-year State University of New York schools for tuition-and-fees is $6,470; at two-year community colleges, the cost is $4,350. Full-time costs for City University of New York schools are about the same. The state also provides nearly $1 billion in support through its longstanding tuition assistance program, which has an adjusted gross income limit of just under $100,000. Those awards top out at $5,165; many grants are smaller.

The plan has the potential to serve as a real support to upstate economies in a number of ways. It would increase the quality of the workforce. It would also serve as a support to employment at the state university system campuses. By increasing the attractiveness of the workforce it could also stabilize the declining upstate population and inject some youth into upstate demographics.

PENSION CHANGES

The Center for Retirement Research at Boston College is a great source of data on public pension systems across the country. This month it has released a study which compares the reform patterns for over 200 major state and local plans between 2009 and 2014 and investigates how and why the changes were made. The study covers all 114 state plans and 46 local plans from the Public Plans Database (PPD) and an additional 86 local plans. In total, the sample includes the major plans for every state. According to the study, 74 percent of state plans made some type of reduction compared to 57 percent of local plans. Second, while the majority of plans reduced benefits only for new employees, about one-quarter also cut benefits for current employees.

The following table from the report describes the legal constraints on changing pension systems.

Table 1. Legal Basis for Protection of Public Pension Rights under State  Laws

Benefit accruals protected

Legal basis Past and future Past and maybe future Past only                       None
State constitution AK, IL, NY AZ HI, LA, MI
Contract CA, GA, KS, MA, NE, NH,

NV, OR, PA, TN, VT, WA, WV

CO, ID, MD, MS, NJ, RI, SC AL, AR, DE, FL, IA, KY,

MO, MT, NC, ND, OK, SD, UT, VA

Property ME, WY CT, NM WI, OH
Promissory estoppel MN
Gratuity IN, TX

Promissory estoppel is the protection of a promise even where no contract has been explicitly stated.

In Texas, this gratuity approach applies only to state-administered plans. Accruals in many locally-administered plans are protected under the Texas constitution.

Sources: Munnell and Quinby (2012); and subsequent communications with plan administrators and legal experts.

This next table, also from that report, indicates the some of the jurisdictions where changes have been made and the nature of those changes.

 

Table A1. Plans Making Changes to Current Employee Core Benefits, 2009-2014  Core Benefits, 2009-2014
Strength of protection
Explanation
Plan name
Constitutional
Detroit Police and Fire Retirement System* Agreement reached after negotiations.
Detroit General Retirement System* City bankruptcy prompted vote by plan participants.
Fort Worth Employees’ Retirement Funda* Reforms apply to future service, ongoing litigation.
Contract: Past and future accruals
Vermont Teachers’ Retirement System Agreement reached after negotiations.
Contract: Past and maybe future accruals
Baltimore Fire and Police Employees’ Retirement System Passed after litigation.
Rhode Island Employees’ Retirement System* Reached settlement after litigation.b
Rhode Island Municipal Employees’ Retirement System* Reached settlement after litigation.b
Contract: Past accruals only
Arkansas Teacher Retirement System* Reforms apply to future service.
Lexington Policemen’s and Firefighters’ Retirement Fund* Accruals before retirement are not protected.
Miami Firefighters’ and Police Officers’ Retirement Trust Non-vested employees are not protected.
Newport News Employees’ Retirement Fund Reforms apply to future service.
North Dakota Teachers’ Retirement Fundc* No legal action.
Pensacola General Pension and Retirement Fund* Reforms apply to future service.
South Dakota Retirement System Reforms apply to future service.
Virginia Retirement Systemd Accruals before retirement are not protected.
Property-based approach: Past accruals only
Cincinnati Retirement System* Reached settlement after litigation.
Milwaukee County Employees’ Retirement System Reforms apply to future service.
Ohio Public Employees Retirement System* Accruals before retirement are not protected.

Our readers may notice that some of the leading “pension offenders” we referenced in our January 3, 2017 issue are not among the list of those who have made positive changes with those listed above. This information can serve as a starting point for investors concerned over the role of pension demands on the fiscal bases supporting their credit choices. Our thanks to the Center for Retirement Research at Boston College.

PORT AUTHORITY OF NEW YORK AND NEW JERSEY

The commissioners of the Port Authority of New York and New Jersey approved a budget that determines how they would spend $32 billion over the next 10 years. The budget was not universally supported especially by some strenuous objections by lawmakers from  New Jersey who argued that the commissioners were shortchanging commuters from their state by including only $3.5 billion for a new bus terminal in Manhattan in their long-term capital plan. The bus terminal is expected to cost much more than that, possibly twice as much.

Gov. Cuomo wanted more of the budget for big projects to go toward improving the airports in New York City, so the budget that resulted was called a “grand compromise.” It allocates $1 billion for a plan to revamp Kennedy International Airport that Mr. Cuomo unveiled a day earlier. It also included about $1.5 billion for a train link between La Guardia Airport and the city’s subway system.

The agency’s chairman said there were no plans for toll increases above the rate of inflation over the next 10 years. That decision constrains the Authority in terms of how much debt it can support for projects over that period. The choices also included new train tunnels under the Hudson, an extension of the PATH train to Newark Liberty International Airport, an overhaul of Terminal A at Newark Liberty and the replacement of Terminals C and D at La Guardia.

The commissioners agreed to include all of those projects, but not to the tune that the New Jersey lawmakers wanted to hear. The lawmakers said they feared that budgeting only a portion of the estimated cost of a replacement for the Port Authority Bus Terminal, which serves 115,000 daily commuters would reduce its chances of timely completion. The project is also being criticized for its proposed location one block west of its current site which would make it less accessible to mass transit connections. The Port Authority will hold two public hearings on the capital plan — on Jan. 31 in Lower Manhattan and Feb. 7 in Jersey City — and before its board takes a final vote on it on Feb. 16.

PROMINENT NUCLEAR PLANTS SLATED FOR CLOSURE

The New York Times reports that the Indian Point nuclear plant will shut down by April 2021 under an agreement New York State reached with Entergy, the utility company that owns the facility in Westchester County, according to a person with direct knowledge of the deal. This despite the fact that the plant is an important supplier of inexpensive power to the metropolitan area. Its generating capacity of more than 2,000 megawatts is about one-fourth of the power consumed in New York City and Westchester County.

Under the terms of the agreement, one of the two nuclear reactors at Indian Point will permanently cease operations by April 2020, while the other must be closed by April 2021. The shutdown has long been a priority for Gov. Andrew M. Cuomo, who — though supportive of upstate nuclear plants — has repeatedly called for shutting down Indian Point, which many feel  poses too great a risk to New York City, less than 30 miles to the south. The governor’s office estimated that, at most, the proposed shutdown would add $3 a month to electric bills in the metropolitan area. Utility customers in New York City already pay rates that are higher than anywhere in the country, except Hawaii.

Political opposition to Indian Point, on the edge of the Hudson River in Buchanan, N.Y., has long emanated from both the public and elected officials.  Options for replacing that power are so far unclear, but potentially could include hydropower from Quebec and power from wind farms already operating across New York, according to the person. Unlike upstate nuclear facilities scheduled to receive operating subsidies under plans we detailed in the summer of 2016,the Indian Point facilities are not dominant employers in Westchester County in the way that the upstate plants are. The plant employs nearly 1,000 full-time workers, about 550 of whom are union members. Entergy estimated that its work force would shrink by about 20 percent, or about 200 jobs, in 2021. After the shutdowns, about 190 workers would stay on for the decommissioning process.

That is not to say that some underlying entities will not suffer a real fiscal and economic impact. Perhaps no single entity will suffer the financial effects of the shutdown more than Hendrick Hudson schools, a district with 2,400 students that draws from parts of a half-dozen towns and villages near the plant. The superintendent said taxes from the company that owns Indian Point, Entergy, made up one-third of the district’s $75.8 million operating budget annually. “We’ve enjoyed some of the lowest property tax increases of any school district in Westchester County and that has made this a very appealing community to move to and stay in,” he said. “Entergy plays a major, major role in keeping taxes down. If they are not operating at the capacity that we’re accustomed to, we are going to have budget deficits.”

Another aspect of the move is that State officials believe the agreement will help convince renewable energy providers that the state is serious about looking for new sources of energy. There is the risk however, that should a viable replacement source not materialize, ratepayers in New York City could face even  higher energy prices for years. The agreement also provides for flexibility if the state cannot find a replacement for Indian Point’s energy: The deadlines in 2020 and 2021 can be pushed to 2024 and 2025 if both the state and Entergy agree.

Entergy has been seeking a 20-year renewal of its license from the federal Nuclear Regulatory Commission since 2007. But New York State officials have challenged that renewal on several fronts and have refused to grant permits that they say the plant needs to continue operating. Leading that opposition has been NYS Attorney General Eric Schneiderman who has opposed Entergy’s relicensing bid in the courts, arguing that the plant poses safety and environmental hazards to the surrounding area; the agreement calls for Mr. Schneiderman to drop that challenge.

TBTA COMING TO MARKET

New York’s other major bridge and tunnel financier and operator, the Triborough Bridge and Tunnel Authority plans to issue new debt this month. The TBTA’s facilities include: Robert F. Kennedy Bridge (formerly the Triborough Bridge), Verrazano-Narrows Bridge, Bronx-Whitestone Bridge, Throgs Neck Bridge, Henry Hudson Bridge, Marine Parkway-Gil Hodges Memorial Bridge, Cross Bay Veterans Memorial Bridge, Hugh L. Carey Tunnel (formerly the Brooklyn-Battery Tunnel), and the Queens Midtown Tunnel. All are major links in the metropolitan area’s transit infrastructure and lucrative revenue sources to the Authority’s parent, the MTA.

When assessing the TBTA credit it is important to note its role as a source of subsidy to the MTA’s mass transit operations. The Authority’s toll rates are reflective not of the direct operating and maintenance needs of the TBTA facilities but of their relatively inelastic demand profiles. This enables the TBTA to charge relatively high tolls which then generate excess revenues for transfer to the MTA. Those tolls also fulfill a role in the attempt to reduce auto traffic into the borough of Manhattan.

Senior lien general revenue bonds secured by a first lien on net revenues of bridges and tunnels; subordinate lien by a second lien on net revenues. The bonds do not benefit from a debt service reserve fund. There is a rate covenant that requires net revenues to be maintained at 1.25x annual debt service for senior lien debt and a strong additional bonds test that requires net revenues to be 1.40 times debt service on outstanding and planned bonds if the bonds are not being issued to keep the facilities in good operating condition. Ratings reflect solid credit fundamentals and assume that the TBTA will continue to grow net revenues; prudently fund asset maintenance and support senior lien revenue DSCRs at or above the 1.75 times board adopted target and total DSCRs at or above 1.50 times.

The reality is that stated coverage levels from net revenues, the security for the TBTA revenue bonds, will always be robust. At the same time, every dollar of those revenues is spoken for from a management and budgeting standpoint. Nonetheless, the TBTA general revenue bonds remain a strong and consistent underlying credit.

PR EXTENSION REQUEST

The Puerto Rico government has formally requested the Financial Oversight & Management Board to extend the stay on litigation provided by the federal Promesa legislation, as well as the deadline for submitting a revised tax plan. In a letter dated January 4,signed by Elías Sánchez, the government’s representative before the board, the administration of Gov. Ricardo Rosselló said it wants to validate and update the fiscal information available to date, address its cash flow problem and resume negotiations in good faith with creditors. It gives three reasons for a delay.

“First, a January 31, 2017 deadline for achieving a certifiable fiscal plan is problematic because Governor Rosselló Nevares will only have been in office since January 2, 2017. Less than a month is simply not enough time for the New Administration’s appointees and the “high- level task force” (as suggested by the Oversight Board in the Letter) to fully and responsibly understand and assess Puerto Rico’s fiscal challenges. It would be far more helpful, as well as consistent with PROMESA, to allow the New Administration and the “task force” sufficient time to perform their responsibilities and to develop their own understanding of the situation so as to maximize the fiscal plan’s reliability and the Government’s autonomy.

Second, because the fiscal plan is the cornerstone of the restructuring process under PROMESA, developing the fiscal plan without leaving enough time to vet and finalize the underlying financial and economic data could lead to a flawed fiscal plan and undermine the success of any restructuring efforts. A rushed restructuring process not based upon a reliable and credible fiscal plan, even if certified, is a recipe for serial restructurings and could prevent Puerto Rico from achieving fiscal responsibility within 10 years.

Third, the Oversight Board’s fiscal plan deadline will undercut the New Administration’s ability to properly engage its creditors in good-faith negotiations to achieve a consensual restructuring of Puerto Rico’s debts. We note that there are 63 covered entities with multiple variations of debt held by different groups of bondholders with different and competing interests. Under Title II of PROMESA, the Government is responsible in the first instance to engage in good-faith negotiations aimed at achieving consensual voluntary agreements with its bondholders. ”

The letter goes on to say that although it may be difficult to achieve consensual Title VI voluntary agreements with every covered entity issuer, even within the time period suggested below, it will be important as a precursor to any restructuring action taken by or on behalf of the Government that various bondholder groups are given adequate financial information for productive dialogue. These discussions could lead to at least a short-term liquidity solution and/or forbearance of remedies, if not a longer term solution. For these reasons, the New Administration respectfully requests the Oversight Board to extend its January 31, 2017 deadline for submitting a certifiable fiscal plan by at least 45 days, subject to further reasonable extensions as may be necessary under the circumstances.

An extension to the stay on lawsuits against the government was also requested. Under federal law, the stay expires mid-February, but the oversight board can extend it for an additional 75 days. However, Promesa stipulates that such extension should be granted in order to provide time to finalize consensual agreements between the government and creditors. Were the stay’s extension not granted, the short time available would force the government to take the “bankruptcy route in court,” which was the past administration’s strategy, Sánchez explained.

While the letter acknowledges it will be difficult to reach voluntary agreements with each of the creditor groups, the extension would provide room for the government to provide more accurate information and provide a basis for constructive dialogue before any debt restructuring action. Although the oversight board published government figures last month after receiving information from the past administration, Sánchez said these “were preliminary, not final ones,” and that “the board itself in its last communication makes clear that they’re going to hire another group of external advisers to look at the numbers.”

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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