Muni Credit News January 5, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

THE LATEST IN P3 PROJECTS

PENSION NEWS

FIRST MUNI TECH BREACH OF 2017

NYC BUDGET OUTLOOK

CONGRESSIONAL REPORT ON PR

HOSPITAL DOWNGRADE

———————————————————————————————————–THE LATEST IN P3 PROJECTS

Miami Beach officials are considering a plan for a South Beach streetcar line utilizing a public-private partnership (P3/PPP). The estimated cost of the project is $244 million. Officials originally planned for a loop around the center of South Beach, stretching from Beach High west on Dade Boulevard and south on Alton Road. Last month, that loop was cut in half because of rising costs and logistical issues. Commissioners heard public comments on the proposed line before a December meeting in which they voted unanimously Wednesday to temporarily stop the fast-tracked light rail project. The commissioners agreed to wait for Miami-Dade County commissioners to make a binding commitment to building a connection across Biscayne Bay, including a funding plan. A final contract for the project would also have to be approved by voters.

The Federal Transit Administration (FTA) and Maryland Transit Administration (MTA) wrote in filings submitted Friday in U.S. District Court in Washington, D.C., that even if no Metro riders used the Purple Line, the light-rail line would still have about 50,000 weekday riders by 2040, compared to the 69,300 currently projected. Ridership at that level would still be enough to meet the line’s purpose—to create a reliable east-west transit system between Montgomery and Prince George’s counties, according to the agencies.

The latest analysis was conducted to satisfy Judge Richard Leon’s November order in the suit brought by two Chevy Chase residents and the trail advocacy group Friends of the Capital Crescent Trail. Leon revoked the project’s federal approval in August andin November he asked the FTA and MTA to prepare a report about whether the agencies believe a new Supplemental Environmental Impact Statement, which would trigger a new public approval process, is needed because of Metro’s ongoing problems.

“There is no plausible basis for finding that reduced ridership (even if it were to occur) would create a seriously different picture of the environmental impacts of the Purple Line,” the MTA wrote in its court filing. The agency also said the analysis of Metro’s problems satisfies Leon’s order and asked the judge to reinstate federal approval of the project to allow construction to begin.

Responding Friday, the agencies said a new environmental study is not needed because even if there were to be a ridership decline on the Purple Line because fewer riders were transferring from Metro, it wouldn’t change the footprint of the project or its environmental impact. About 27 percent of the Purple Line’s ridership is expected to transfer from Metro.

“Potential effects that may result from a Purple Line ridership decline due to [Metro] issues would be minimal,” the FTA wrote in its filing. The agency also notes that federal law does not require it to analyze other alternatives—such as a Bus Rapid Transit line. Instead, it’s only required to consider the new information about Metro.

In addition to what the FTA considers to be the highly unlikely scenario of no Metro riders using the Purple Line, the agency also looked at four other scenarios to determine Metro’s potential impact on the Purple Line. The agency found: if Metrorail ridership grows by about 40 percent from 2018 to 2040, then Purple Line ridership would be estimated at 66,766 riders per weekday. If Metrorail ridership grows at about 20 percent from 2018 to 2040, then Purple Line ridership would be 64,463 per weekday. If Metrorail ridership stabilizes, but doesn’t grow from 2018 to 2040, then Purple Line ridership would be 62,768 per weekday. If Metrorail ridership continues to decline at the rate it has declined from 2008 to 2015—about 5 percent—then Purple Line ridership would be 60,276 per weekday.

Construction was scheduled to begin this year, but has been delayed due to the lawsuit. The Purple Line project director, wrote in a court document recently filed that further delaying the construction could cost the state $13 million per month and that an extended delay could cause the state to lose the $400 million it already invested in the project.

Now that the two transit agencies have responded to the order, the plaintiffs in the case have two weeks to respond to the motion. After that, the judge is expected to consider the arguments and issue a new ruling.

PENSIONS

After twice vetoing similar measures, New Jersey Gov. Chris Christie at year end signed a bill that will require the state to make quarterly pension contributions, as opposed to one annual lump-sum payment. The bill cleared both state legislative chambers unanimously in November.

However, there’s skepticism around the new law because it still doesn’t require the state to make full payments — and New Jersey has historically shorted its contributions or skipped them entirely. The new law will require governor to make pension payments on a quarterly basis by Sept. 30, Dec. 31, March 31 and June 30 of each year, instead of at the end of the fiscal year in June. In exchange, the pension fund would reimburse state treasury for any losses incurred if the state has to borrow money to make a payment.

The Supreme Court of California has a case before it with the potential to alter the political and legal conversations about pensions in the Golden State and beyond. Sometime in the first half of the year, the court is expected to hear an appeal of a landmark pension ruling out of Marin County that challenges the decades-old precedent known as the “California Rule.”

An appellate court ruled unanimously in August that the Marin County Employees’ Retirement Association was free to modify the pension formula to reduce unearned benefits for current employees, a decision is at odds with the state Supreme Court’s 1955 ruling granting employees the right to continue earning pension benefits throughout their careers that are at least as good as those offered when they were hired.

A date for arguments has not been set, as the Supreme Court is waiting for another similar case from Alameda County to work its way through the appellate process before it takes up the question itself. The case arose in the aftermath of California’s Public Employees’ Pension Reform Act, or PEPRA, which took effect in January 2013.

The law was an effort by reform advocates to crack down on pension benefit “spiking,” which is the practice of inflating pension benefits by calculating things like unused vacation time or various bonuses into the formula at the end of an employee’s career to raise the amount employees are entitled to after retirement.

California Gov. Jerry Brown vigorously attacked spiking in supporting PEPRA, labeling the practice “abusive.” PEPRA said that pensions had to be calculated based only on an employees’ regular pay, but MCERA’s move to apply the anti-spiking change to existing employees rather than only new hires landed the issue in court.

Experts on pensions and bankruptcy said that the ruling has the potential to be far-reaching not only in how pension benefits are negotiated in California, but also in other states because of how influential the California Rule decision has been nationally.

In a May 2012 paper critical of the rule published in the Iowa Law Review it was noted that courts in at least twelve states have cited the California Rule in their own pension decisions. They include Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont, and Washington.

“In nearly all of these jurisdictions, the courts adopted the California Rule without much discussion, appearing to merely find it the most attractive of the available non-gratuity options,” according to the ILR paper. Some states went on to subsequently modify the rule, and some states, such as New Jersey, explicitly rejected it.

But the California Rule remains influential, and lawyers and pension reform advocates are closely watching the MCERA case to see if the state’s top judges, themselves public employees entitled to pensions, will alter the landscape Californians have been living with for 60 years. Even if the Supreme Court does rule that changes to the existing benefit formula are legal, it would not force those changes to be made. The Supreme Court could take several months to make a ruling even once oral arguments are held.

FIRST MUNI TECH BREACH OF 2017

The Burlington VT Electric Department has acknowledged that a Russian campaign linked to recent cyberattacks had breached a single laptop within the utility, though it was not connected to the organization’s electrical grids. Does the breach signal vulnerabilities within the American electrical grid? The penetration, first reported by the Washington Post, which cited U.S. officials including at least one senior administration official, could be an attempt to test Russian capability to disrupt other utilities.

American officials believe a cyber-campaign against the U.S. energy industry in 2014 resulted in at least 17 companies’ systems being penetrated, including four electric utilities. The U.S. Department of Homeland Security has said the attackers in the 2014 blitz were able to steal data and gain private network access, which could allow them to remotely adjust equipment settings.

Such efforts have been a long term fear of industry professionals and antiterrorism professionals for the crippling impact on national life that an attack on America’s highly computer dependant and connected national utility grids could have. It makes sense that such efforts would start on a small scale. The limited scope of this event provides some comfort but not much in the grand scheme of things. It supports our view of the potential negative impact on smaller municipal operations.

NYC BUDGET OUTLOOK

Recently, the NYC Independent Budget Office said that Mayor de Blasio’s latest  financial  plan might   best be described as a placeholder. It recognizes some new spending needs, realizes additional federal and state support, and carves out some   savings in city spending. IBO estimates the city will end the current fiscal year  with  a surplus of  $801  million,  which is $362 million above the de Blasio Administration’s   estimate.

This surplus estimate does not include the $1.5 billion currently sitting in two reserves within the fiscal year 2017 budget—these reserves are counted as expenditures but  do  not  currently  support any specific spending needs. If these funds are not used to cover unexpected spending needs or revenue shortfalls, they will become part of the    surplus, which would more than suffice to close the $1.9 billion budget gap (3.0 percent of city-funded   expenditures) IBO forecasts for 2018.

 

Total Revenue and Expenditure Projections

Dollars in millions

2017 2018 2019 2020 Average Change
Total Revenue $83,884 $85,551 $88,916 $92,451 3.3%
Total    Taxes 54,232 57,174 60,043 63,019 5.1%
Total Expenditures 83,522 87,778 91,468 93,899 4.0%
IBO Surplus/(Gap) Projections $- ($1,865) ($2,551) ($1,448)
Adjusted for Prepayments and Debt Defeasances:
Total Expenditures $86,878 $88,415 $93,240 $95,678 3.3%
City-Funded Expenditures $62,430 $65,222 $68,036 $70,002 3.9%
NOTES:  IBO  projects   a   surplus   of   $801   million   for 2017,  $362  million  above  the  de  Blasio Administration’s forecast. The surplus  is  used  to prepay some 2018 expenditures, leaving 2017 with a balanced    budget.    Figures    may    not    add    due    to rounding.

New York City Independent Budget Office

 

Although IBO expects the  local  economy to continue to grow throughout the 2017- 2020 financial plan period, the pace will slow markedly from  the  last seven years of expansion. Following the record increase of nearly 140,000 new jobs created  in calendar year 2014, job growth slipped to  86,400 last  year.  The  city  has added 67,200 jobs  through the   first 10 months of this year—but with no net growth since July.

IBO’s forecast for 2018 and beyond  has far more uncertainties than   usual.   For    now    it is premised  on Congress agreeing to infrastructure spending and tax cuts, generating considerable fiscal  stimulus in 2018. In a forecast largely completed before the  presidential election,  IBO expects New York City’s economy to extend its long expansion through the financial plan period, but at an attenuated pace. The election itself has introduced the prospect of far-reaching changes in  federal policy  that   may   impact the city in a variety of ways, some positive, some negative, but at this point all remain highly uncertain. Individual and corporate tax cuts could boost the city economy, but if federal rate cuts are paid for in part by curbing  state and local tax deductibility,  that would work against the city, which disproportionately benefits from that deduction.

And insofar as federal tax cuts are not paid for, it is difficult to say how  a rapid escalation of debt will effect expectations of both national and local growth. The city economy might also be adversely affected by uncertainty about the future status of its large immigrant    population. There  is anecdotal evidence that this is already prompting a slowdown in nonessential spending in some city neighborhoods with heavy concentrations of undocumented residents.

CONGRESSIONAL REPORT ON PR

On December 20, 2016, the Congressional Task Force on Economic Growth in Puerto Rico released is long awaited report containing its recommendations for what tax and legislative actions might be taken by the U.S. Congress to stimulate near-term economic growth in support of improved fiscal conditions for the Commonwealth of Puerto Rico. The report included a significant of information on Puerto Rico’s economic conditions which need not be reiterated here. Of more interest are some of the recommendations the Task force offers to address these ills.

The Task Force recommends that Congress enact fiscally-responsible legislation to address the impending Medicaid cliff established by the ACA. The Task Force recommends that Congress begin to address the funding issue early in calendar year 2017 to enable the Puerto Rico Medicaid agency to engage with more certainty when formulating capitation payment contracts with its managed care organizations for Puerto Rico Fiscal Year 2017-2018, which begins on July 1, 2017. In addition, the Task Force recommends that,  going forward, federal financing of the Medicaid programs in Puerto Rico and the other territories should be more closely tied to the size and needs of the territory’s low-income population.

The Task Force recommends that Congress amend federal law so that, going forward, Medicare beneficiaries in Puerto Rico are automatically enrolled in Medicare Part B with the option to opt out of coverage, the same way their counterparts in every state and other territory are treated.

As long as Puerto Rico remains the only U.S. jurisdiction where Medicare beneficiaries are required to opt in to Part B coverage, the Task Force recommends that the Centers for Medicare and Medicaid Services and the Social Security Administration take timely and targeted steps to educate island residents about the existence of the opt-in requirement and  the financial consequences of late enrollment.

The Task Force recommends that Congress amend Section 24 of the Internal Revenue Code to authorize otherwise eligible families in Puerto Rico with one child or two children to claim the additional child tax credit, with the amount of the credit equal to the amount of annual federal payroll taxes paid by the family or $1,000 per qualifying child,  whichever  is  lower. It has been estimated that this proposal could benefit about 355,000 newly- eligible families and 404,000 newly-eligible children in Puerto Rico, with an average credit for all Puerto Rico families of $770, which will help reduce child poverty on the island.

The Task Force recommends that Congress make the full amount of the rum cover-over payment to Puerto Rico and the U.S. Virgin Islands permanent, rather than permanent in part and subject to tax extenders legislation in part. The Task Force further recommends that Congress increase the cover-over payment from the current rate of $13.25 per proof gallon to the generally applicable distilled spirits rate, currently $13.50 per proof gallon. At a minimum, the Task Force recommends that Congress extend the additional $2.75 per proof gallon component of the rum cover-over payment beyond 2016. Failure to extend the provision will cause harm to Puerto Rico’s (and the U.S. Virgin Islands’) fiscal condition at a time when it is already in peril.

As long as the Section 199 domestic production activities deduction remains part of U.S. tax law, the Task Force believes that it should apply in Puerto Rico, a U.S. jurisdiction home to American workers. The Task Force recommends that Congress amend Section 199 so that it applies to Puerto Rico on a permanent basis.  At a minimum, the Task Force recommends  that Congress—for the sixth time since 2006—extend the provision beyond 2016.

The Task Force believes that the Puerto Rico Electric Power Authority’s record of service  has not inspired confidence among its customer base in Puerto Rico, and recommends that  the government of Puerto Rico continue efforts to make operational reforms at PREPA, improve the efficiency of electricity generation and transmission, and diversify Puerto Rico’s energy supply—all with the ultimate goal of making electric power more reliable and affordable.

HOSPITAL DOWNGRADE

While we maintain that large multi-state systems are better credits within the hospital sector, a road without bumps is not guaranteed by that structure. Trinity Health is one of the largest not-for-profit healthcare systems in the U.S. and represents the May 2013 merger of Trinity Health and Catholic Health East. The system operates over 90 hospitals in 22 states across the U.S. and is headquartered in Livonia, Michigan. Trinity is issuing four series of bonds to reimburse itself for prior capital expenditures and pay down a portion of its outstanding commercial paper.

All debt of the legacy organizations are secured on parity through a Master Trust Indenture. Trinity Health may not withdraw from the Obligated Group. The Credit Group consists of Members of the Obligated Group and the Designated Affiliates. The Designated Affiliates include the majority of the hospitals except for New York facilities and Mercy Chicago. The Obligated Group pledges to cause the Designated Affiliates to pay, loan or otherwise transfer to the Obligated Group such moneys as are necessary to pay amounts due on the bonds. Its pledge of revenue is derived from the operation of all facilities of the majority of the Designated Affiliates, including rights to receivable accounts and health care insurance receivables.

Its low AA ratings reflect several key strengths including the organization’s large size and geographic diversity across many markets, with broad diversity of revenue and cash flow. Key challenges include weaker performance in 2016 with expectations that it will take several years to return performance to prior levels. Additional challenges include operations in some markets with challenging demographics including weaker payor mix, low population growth, or modest market share within those service areas.

 

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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