Muni Credit News January 24, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

BEEN DOWN THIS ROAD BEFORE

WILL THE BLACK HOLE MOVE TO VEGAS?

PROMESA REPLIES TO THE NEW GOVERNMENT

FREE TUITION IS A SPREADING IDEA

LIPA NEARING WIND FARM AGREEMENT

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BEEN DOWN THIS ROAD BEFORE

A new Washington Post-ABC News poll of 1,005 respondents carried out from Jan. 12 to Jan. 15 showed that President Trump’s proposed reliance on tolls from revenue-producing infrastructure projects was not strongly supported. The tolling plan was strongly opposed by 44% of those polled and somewhat opposed by 22%. Only 11% said they strongly supported the Trump proposal and 18% were somewhat supportive. In a presentation to The United States Conference of Mayors VP-elect Pence said the new administration will work with city and state officials to fund infrastructure projects that deliver results. Trump’s experiences as a developer showed him the significant economic benefits that can result from large infrastructure projects, Pence said.

“Our president-elect believes, as I do, that the federal government can play a critical role in helping our cities thrive,” he said but, Trump last week appointed two well-known New York City developers to leadership of a panel that would oversee the nationwide infrastructure plan. Steven Roth of Vornado Realty and Richard LeFrak of LeFrak Organization have agreed to head up the infrastructure council, according to the Wall Street Journal. We note that Messers. Roth and LeFrak are well known builders of commercial and residential buildings but have no particular history with public infrastructure.

At the same time, Transportation Secretary-designate Elaine Chao tried to send more of a public funding oriented message when she said at her Senate confirmation hearing last week that Trump would be agreeable to more direct federal funding of state and local projects than is contained in the five-year Fixing America’s Surface Transportation Act adopted in 2015. according to House Speaker Paul Ryan, President-elect Donald Trump’s massive infrastructure package should have $40 of private-sector spending for every $1 of public spending by Ryan’s calculation.

Trump claims his plan would be revenue neutral thanks to taxes from new jobs and contractor profits. Ryan also confirms our concerns about what constitutes infrastructure.  “That’s airports, that’s pipelines, that’s roads, that’s bridges, that’s harbors, that’s canals,” said Ryan when giving examples of proposed infrastructure. The President-elect ’s nominee to lead the Commerce Department, Wilbur Ross, told the Senate “The infrastructure paper I put out was meant to provide another tool, not to be the be all and end all.” “There will be some necessity for [direct federal spending on transportation], whether it’s in the form of guarantees or direct investment or whatever.”

We look at the whole scheme with great skepticism. The last two eras of huge infrastructure spending were federally funded  to stimulate the economy (depression era spending programs) or as military programs (the start of the interstate highway system). Neither round was designed to be funded out of contractor profits. We remember more recently the experience when efforts were made to toll sections of Interstate 80 in Pennsylvania which were met with massive opposition from both long distance users but especially those residents for whom interstates effectively serve as local connectors between towns. “Tolling the interstates is a total non-starter,” said Chris Spear, president of American Trucking Associations. “It is toxic and we will fight it, tooth and nail. We need national connectivity and tolling is the worst type of approach.”

Virginia appears to be in the crosshairs of any initial effort to establish private infrastructure finance. The Trump transition team has asked Virginia for a list of potential transportation projects, including specific questions about projects that could include tolls, the state’s transportation secretary says. Virginia responded with a list of projects based on statewide priorities, ranging from the Port of Virginia to Interstate 81. Tellingly, the VDOT Secretary Layne’s response was qualified. “We’d be very happy to have more (projects). But quite frankly, it’s only a very small part of our projects because it’s going to require tolling,” Layne said.

Secretary Layne reinforced the notion that the incoming administration’s infrastructure proposal appears to be focused on $137 billion in tax credits for private companies who invest in return for revenue streams from the projects like tolling. As for the reliance on tax credits – “I think that’s actually a red herring, because most of these guys don’t need tax credits, because for the beginning years there is no taxable income,” Layne said.

“Most of the infrastructure needs in this country are rebuilding assets that aren’t putting in capacity.  … You need a sustainable, multimodal, growing revenue source,” he said. “And so far, that hasn’t come out of the Congress and the Trump administration. Now, maybe repatriation of taxes will be that source; I don’t know.” Virginia has a backlog of projects including  for additional VRE capacity on the Fredericksburg Line; fixes for Interstate 95 southbound at exit 126 onto Southpoint Parkway in Spotsylvania County; $1 million to help convert Columbia Pike in Arlington into a “smart corridor” that could increase transit convenience and use; changes for the intersection of Waxpool Road and Loudoun County Parkway; upgrades for Arcola Boulevard in Loudoun County; and a series of northern Virginia bike, bus and pedestrian projects.

WILL THE BLACK HOLE MOVE TO VEGAS?

The Oakland Raiders have made it official and applied to relocate to Las Vegas. The league, which has stridently avoided Las Vegas due to concerns about gambling-related issues, would require approval from at least 24 of the 32 teams, and the earliest the owners are expected to vote is late March. The request has come in the face of the explosive growth in daily fantasy sports and other forms of wagering. The N.F.L. is still wary of gambling and its potential influence on games, but players, coaches and some owners, unsurprisingly most notably Jerry Jones of the Dallas Cowboys are not.

The Raiders have said they want to move to Nevada because they have failed for years to find a replacement for their home, the Oakland-Alameda County Coliseum, one of the oldest and most decrepit stadiums in the league. Local government officials have said they cannot pay a large share of the bill for a new sports facility, something the Raiders have demanded. The Raiders would leave a city that already lost the team once, when it moved to Los Angeles in 1982 before returning in 1995. They have significant fan bases in both Northern and Southern California.

This would be the Raiders second recent attempt as they  tried to leave Oakland last year but failed to persuade the owners of other teams to let them build a new stadium in Southern California with the Chargers, who last week announced their move from San Diego to Los Angeles. So the Raiders owner Mark Davis, who also had held meetings with officials in San Antonio, began meeting with lawmakers in Nevada, who ultimately agreed to contribute $750 million in hotel taxes to help pay for a domed stadium that Davis wants to build in Las Vegas.

Lawmakers and business leaders in Oakland can still come up with an alternative plan to keep the Raiders, but time is of the essence. The City Council voted last month to give Fortress, an investment group, 60 days to persuade the Raiders to consider a plan to build a new stadium in Oakland. There are significant questions as to whether Las Vegas can sustain an N.F.L. team, although with about 2.5 million residents, the metropolitan area is bigger than several others with N.F.L. teams, including Buffalo, Green Bay and New Orleans.

How Davis intends to pay for a stadium, could be problematic because the league prohibits owners from having direct interest in gambling establishments. Sheldon Adelson, a casino magnate and the chairman of the Las Vegas Sands Corporation, will reportedly pay $650 million for a share of the new stadium, which is projected to cost $1.9 billion. It is unclear, though, whether he also wants a share of the Raiders.

The N.F.L. owners’ stadium and finance committee was shown plans last week by the Raiders that included building a stadium without financial support from Adelson. Davis will be eligible to receive $200 million in financial aid from the league for stadium construction, and presumably can raise money through the sale of stadium naming rights and licenses to purchase season tickets. But he would also have to pay a relocation fee, which will run into the hundreds of millions of dollars.

Oddly enough, the team will play in Oakland for at least two more seasons while a stadium in Las Vegas is being built. At least that  is built for pro football whereas the L.A. Chargers temporary home will be a 27,000 seat soccer stadium.

PROMESA REPLIES TO THE NEW GOVERNMENT

The Financial Oversight and Management Board for Puerto Rico, in a letter to the governor, outlines five areas that the Rosselló administration must include in its fiscal plan for the government to generate, between now and fiscal year 2019, additional revenue and/or savings totaling $4.5 billion a year – The five areas include “revenue enhancements” through adjustments to the island’s tax system and improvements in tax administration; “government right-sizing, efficiency and reduction”; reducing health care spending; reducing higher education spending; and “pension reform.”

According to the Board, the revised fiscal plan baseline released by the prior administration estimated that, unless significant fiscal and structural measures are implemented, the Government will have an annual average fiscal gap of $7.0 billion from fiscal year 2019 to fiscal year 2026. In the coming days, it expects to complete the engagement of a forensic accounting firm to: (1) validate the bridge between the Commonwealth’s last audited financial statements as of June 30, 2014 and the fiscal plan, and (2) provide an independent report on the total outstanding indebtedness for the Commonwealth by issuer, list of all debt issues by issuer, use of proceeds of each debt issuance, contractual debt service schedule and debt service currently in default.

Ominously for bondholders, the letter states that even with the immediate successful implementation of these measures the Implied Primary Surplus Available for Debt Service on fiscal year 2019—before taking into account any legacy deficits—is $0.8 billion, which represents only 21% of the contractual debt service of $3.9 billion for fiscal year 2019.

It acknowledges that “from your executive orders declaring a fiscal emergency, imposing salary freezes, limiting the number of non-career personnel and other labor cost reductions and requiring agencies to build zero-based budgets, it appears that your administration shares this priority [of achieving savings through government right-sizing and efficiency improvements.] . The Board recommends that the Government should consider taking the following actions: reducing non-personnel expenditure by at least 10% by re-negotiating large contracts, centralizing purchasing, and implementing other procurement best practices, such as clean sheeting and demand management, among others; reducing payroll costs by approximately 30% by substantially eliminating positions and making other reductions to total public labor compensation, including consolidating and significantly reducing non-essential Government services; eliminating municipal and private sector subsidies and ; right-sizing K-12 education expenditures to the current student population.

The fiscal board also tells the governor that it is “favorably inclined” to extend the deadline for submitting its fiscal plan to the board until Feb. 28, “such that the Board may certify the fiscal plan by no later than March 15, 2017.” The Oversight Board also tells Rosselló it is “favorably inclined” to extend Promesa’s automatic stay on litigation until May 1, “subject to the same conditions.”

So it is fairly clear what must be done. Now we will have a chance to see if the new administration is as serious as it said it was about realistically solving the island’s fiscal situation. The litigation stay is a two sided coin giving the new group some arguably necessary breathing room but nonetheless extending the level of patience required from bondholders from whom so much has been asked already.

FREE TUITION IS A SPREADING IDEA

Rhode Island Governor Raimondo has become the second Democratic governor this month to announce a plan to guarantee a college education. New York Gov. Andrew Cuomo was the first, with a $163 million proposal to cover tuition at New York’s public colleges and universities for in-state residents whose families earn no more than $125,000 a year.

Raimondo said her plan will cost $30 million a year and cover two years of free tuition at the Community College of Rhode Island (CCR), Rhode Island College(RIC) and the University of Rhode Island (URI). The idea, called the Rhode Island Promise Scholarship, doesn’t propose an income cap as New York’s does. Neither plan would cover room and board.

Students entering CCRI after graduating from high school would be eligible for two years of free tuition and waived mandatory fees, meaning they could earn an associate’s degree essentially without cost. Students at RIC and URI, four-year institutions, would be eligible for similar assistance during their junior and senior years, making their last two years essentially free. According to a study last year by LendEDU, a private group, recent RIC graduates left school with an average of $26,624 in loan debt, with URI graduates burdened by an average of $32,587. When all of the state’s public and private colleges were included, Rhode Island had the second-highest loan debt of any state. Only Connecticut was higher.

The Promise Scholarship program would be open to all resident students who enroll at a state college within six months of graduating high school or earning a GED prior to reaching the age of 19. Public, private and home-schooled graduates would all be eligible. There would be one scholarship per person. A student receiving assistance while at CCRI would not be eligible again after transferring to URI or RIC. Students would have to complete the Free Application for Federal Student Aid, or FAFSA. Federal Pell Grants and other such financial aid would be factored into the free-tuition calculation, lowering the state’s contribution. Students would be required to remain in good academic standing, with at least a 2.0 GPA. RIC and URI juniors and seniors would be required to have completed their sophomore year, having earned 60 credits and declared a major.

The program would cost $10 million in fiscal year 2018, $13 million in 2019, $18 million in 2020, with a projected annual cost of $30 million in 2021, when members of high school classes of 2017 will be seniors in college. Beginning this fall, tuition and mandatory fees are $4,564 at CCRI, $8,776 at RIC and $13,792 at URI. According to data cited by Raimondo’s deputy chief of staff, all Rhode Island high schools graduate a total of roughly 12,000 students every year.

LIPA NEARING WIND FARM AGREEMENT

And in New York, after years of stymied progress, the Long Island Power Authority has reached an agreement with Deepwater Wind, which built five turbines in the waters of Rhode Island , to drop a much larger farm — 15 turbines capable of running 50,000 average homes — into the ocean about 35 miles from Montauk. If approved by the utility board this week, the $1 billion installation could become the first of several in a 256-square-mile parcel, with room for as many as 200 turbines, that Deepwater is leasing from the federal government.

The Long Island site is part of a plan to meet Gov. Andrew M. Cuomo’s goal of drawing 50 percent of the state’s power from renewable sources by 2030. That includes developing 2.4 gigawatts of offshore wind, he said in his State of the State address this month, by far the nation’s highest target, equaling the capacity of the Niagara Falls hydroelectric generating station.

Executives have negotiated a contract that they expect the board to approve. Under it, LIPA will purchase all of the electricity delivered from the turbines by an underwater transmission line to a substation in East Hampton, paying a price comparable to what it would pay for other utility-scaled renewables like onshore wind and solar, according to the utility. Those prices have run around 16 cents a kilowatt-hour, higher than its average wholesale price of 7.5 cents.

Deepwater plans to finance the project with a mix of loans and equity investments, though it is unclear if it will be able to benefit from federal tax credits that have spurred investment in wind farms and helped reduce the price of the power they produce. Until this year, a federal investment tax credit worth 30 percent of the development cost could be claimed. That has dropped to 24 percent for projects that begin this year and is set to be phased out by the end of 2019. To qualify, the project would need to demonstrate construction activity by then, which could be open to interpretation by the Treasury Department. This seems like a better example of infrastructure under the Trumpian vision of tax credit based financing. It would also fit the Trump criteria of “big and shiny”.

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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