Muni Credit News January 26, 2017

Joseph Krist










If you wanted a sure fire way to throw a wrench into  the state budget making process, proposing block granting the Federal share of Medicaid is a pretty good place to start. So in spite of the many issues such a change would raise, Kellyanne Conway, who is Mr. Trump’s White House counselor, said that it would ensure that “those who are closest to the people in need will be administering” the program. Since its creation in 1965, Medicaid has been an open-ended entitlement. If more people become eligible because of a recession, or if costs go up because of the use of expensive new medicines, states receive more federal money.

Among the uncertainties which would result from such a change are: How much money will each state receive? How will the initial allotments be adjusted — for population changes, for general inflation, for increases in medical prices, for the discovery of new drugs and treatments? Will the federal government require states to cover certain populations and services? Will states receive extra money if they have not expanded Medicaid eligibility under the Affordable Care Act, but decide to do so in the future?

A bipartisan group of governors raised issues like: “States would most likely make decisions based mainly on fiscal reasons rather than the health care needs of vulnerable populations.” “States should be given the ability to reduce Medicaid benefits or enrollment, to impose premiums” or other cost-sharing requirements on beneficiaries, and to reduce Medicaid spending in other ways. “Flexibility would really mean flexibility to cut critical services for our most vulnerable populations, including poor children, people with disabilities and seniors in need of nursing home and home-based care.”

Speaker Ryan indicated that House committees will mark up a reconciliation package in the next couple of weeks that will both repeal President Obama’s healthcare law and replace portions of it. Yes, portions of it. It will be a repeal with some replacement in it for what is able to be done given the reconciliation process. This does not do a lot to reduce uncertainty for state government. Of course, anything that causes state budget uncertainty leads to uncertainty for providers. There were already enough issues facing hospitals in 2017 that made the sector particularly credit vulnerable. This proposal simply ratchets up that uncertainty for investors and decreases the attractiveness of the sector even more.


With all of the emphasis on the impact of block granting Medicaid on states, it is easy to forget that county governments pick up 25% of the cost of the program. In addition, New York City functions as one county in that regard as it picks up 25% of the Medicaid costs in the City. As the effective front line providers of Medicaid funding, counties had historically come under strain financially. In past decades, county health facilities serving those patient cohorts experienced extraordinary pressures leading to low liquidity, extra borrowing, and the need to sell or close hospital and other health facilities. These included not just smaller rural counties but major metropolitan counties like Erie in NY, Fulton in GA, Dade in FL, Cook in IL, and San Bernardino in CA.

New York City will find itself under pressure as the result of its unique position in the Medicaid funding chain. If block grants reflect reduced revenue, the City will have to find other sources of expense reduction to offset the burden. This will be more difficult than some might expect as the DeBlasio administration’s hiring spree has built in much more employee expense to the budget. We anticipate that the City’s ratings would come under pressure under those circumstances.

Thus, the proposed changes to Medicaid add additional worry to those investors who may have already soured on the GO sector. Added to pension and benefit pressures, Medicaid may become one more brick on a load that threatens to weaken the sector in general and some credits in particular.


The Mayor released his latest Financial Plan Update and his preliminary look at the upcoming FY 2018 budget. This indicated several more potential headwinds for the City. Tax revenue growth is expected to slow to 2.4% in FY 2017 and improve moderately to 3.9% in FY 2018. Non-property taxes were flat in FY 2016 and are expected to grow 0.5% in FY 2017. Taxes from real estate transactions have declined nearly 15% in the first half of FY 2017 relative to the same period in FY 2016. In addition, the Plan makes certain assumptions that face difficulties in Albany. These include approval of the Governor’s college tuition plan and the extension of the highest tax bracket a.k.a. the Millionaire’s Tax.

Since the last Plan Update in November, the City projects reductions in reserves of $1.2 billion and unspecified savings of nearly $600 million in order to cover a projected gap of $2.6 billion in FY 2018. This in spite of projected annual growth in personal service cost expenditures of 5.5% over the next four years. Debt service is projected to increase 8% annually  in support of a robust capital program. Bonded debt issuance is projected at $6.5 billion annually over 10 years. It is hard to see how that level of spending growth can be sustained. Should the Mayor not be reelected this November, his successor will be saddled with significant expense management issues.

These factors, in combination with the Medicaid issues noted in the prior section, make us cautious on the outlook for the City’s credit. Approximately 25% of budgeted revenues come from state and federal sources and both are subject to significant uncertainty. Should all of the headwinds we have mentioned to occur, it will take strong, timely, and decisive management to handle their impact and maintain the City’s fiscal position and ratings. Here, we think that the Mayor’s record to date does not inspire confidence.


The Securities and Exchange Commission announced fraud charges and an emergency asset freeze obtained against a businessman in South Carolina accused of siphoning funds he raised from investors for the purpose of purchasing or renovating senior housing facilities.

The SEC alleges that Dwayne Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings.   The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama.  From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.

“As alleged in our complaint, investors thought they were investing in a single senior housing project while their money was actually being used to fund an ever-expanding web of affiliated facilities and the personal expenses of Edwards and his friends and family,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, filed January 20 in federal district court in Newark, N.J., also charges Edwards’s former business partner Todd Barker, who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.


Senate Democrats were to present their plan for a $1 trillion infrastructure plan. That plan dedicates $180 billion to rail and bus systems, $65 billion to ports, airports and waterways, $110 billion for water and sewer systems, $100 billion for energy infrastructure, and $20 billion for public and tribal lands. At the same time, the Republican leadership gave quite mixed signals regarding the timing of any infrastructure legislation. A major infrastructure package, initially had not been part of Ryan’s 200-day plan. But in recent days, Trump had personally asked Ryan to add it in. That said, healthcare and tax reform are farther along in the process and that could delay infrastructure legislation into the fall. Now some will be satisfied with enactment by year end.

States and localities are not waiting for federal action. There is some $3 billion of airport, highway, and mass transit bonds on the near term calendar. While Washington argues over the method of financing and identifying infrastructure, projects are moving forward reflecting the strong voter support for such spending shown at the polls in November from coast to coast. And they are using tax exempt bond proceeds to fund it which is something for the Congress to think about as they debate taxes and the tax exemption going forward.


The response of the incoming Rosello administration to PROMESA’s ideas about the way forward for Puerto Rico was quick to be received. It exposed the great divide between the various interested parties in the financial crisis. The Governor’s response was direct. ” It is my view, that any fiscal plan premised exclusively on a reduction in the health, well-being, and living standards of the People of Puerto Rico through healthcare delivery cutbacks, current retiree  pension reductions of our most vulnerable segments of the population, and layoffs is by its nature unacceptable.” The Governor cited Executive Order  No.  2017-001,  which,  among other  cost reduction  initiatives, (1) imposed a reduction of ten percent in government spending for the current fiscal year; (2) ordered a reduction of ten percent (10%) in professional service contracts, and a five percent (5%) decrease in utility spending  for  all  government agencies and public corporations; and (3) mandates  a  twenty percent (20%) reduction in positions of trust in each agency and/or public corporation.

Two other orders require all agencies and public corporations to establish a Zero-Base Budgeting methodology as a way to reduce government spending and imposes a five percent (5%) reduction in purchases of goods in all government agencies. At the same time, the response set out clear areas of contention between the board and the government. Rosello was clear when he said ” we will not increase taxes on the poor and middle class. Instead, where opportune to spark economic growth we intend to reduce such personal income taxes. We seek to establish a comprehensive tax reform. We have already achieved a 10-year extension to the 4% excise tax of Act 154-2010. We will focus on increased collection rates of existing taxes through increased resources and improved processes and technology. We will achieve approximately $600 million in potential incremental revenues from effective collections of the SUT.”

“Currently, only 89,000 individuals file tax returns reflecting earnings in excess of $60,000. This represents only 2.5% of the population. A collaboration strategy with the IRS or global experts could help the Government assess the degree of tax evasion faced by the Commonwealth and will form the basis for new  compliance strategies. As was our commitment, a permits reform will be proposed in the next two weeks. We will seek to increase SUT collections and level the playing field with local businesses by collecting taxes on internet retail sales. We will approve a new Incentives Code to rationalize tax incentives and only maintain the ones that produce a quantifiable return on investment. And we intend to overhaul and modernize municipal property tax and other taxes system to implement projected municipal subsidy reduction. We do not agree with a payroll-focused approach to right-sizing government.”

The position on healthcare and Medicaid may not be realistic. The letter states although additional ACA funding is not contemplated in your baseline assessment, we feel highly confident that we will convince the  Congress of the grave challenges that our people will face if not granted parity in Medicaid and Medicare funding. There is no single political leader in the world that would want to be responsible for bearing the weight of endangering the health and wellbeing of 3.5 million of its citizens. Actually, there is. His name is Trump and he is willing to “endanger” the health and well being of some 20 – 30 million mainland Americans.

Other items include ” We will not limit access to higher education as a key enabler of social mobility and economic development. Plans for pensions would include reform of the various retirement systems, privatizing the defined contribution plans by liquidating the trust fund and transferring  the assets to a 401 (k) program and honor the defined benefits plans with a PAYGo system.

As for the question of debt service, “we will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by PROMESA. We will continue to negotiate with the various creditor groups in good faith, respecting the rule of law, and based on a transparent and audited baseline. As we have agreed, the Government will lead the good faith negotiations with creditor groups with the Board’s collaboration. We will respect the priority of payments established in the various credits and we will establish alternative paths for various creditors, including the possible implementation of a mechanism to mitigate losses incurred by local resident investors.

Clearly the letter is not a blueprint for a swift resolution of this ongoing disaster. It clearly excludes a number of plausible and likely needed actions while further cementing the concept of debt reduction through less than full payment. We are troubled by the articulation of different standards for Puerto Rican versus non Puerto Rican debt holders. All in all the situation continues down its messy path.

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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