Senior Municipal Credit Consultant
BOARD OF EDUCATION OF THE CITY OF CHICAGO
UNLIMITED TAX GENERAL OBLIGATION BONDS (DEDICATED REVENUES)
Moody’s: B3 S&P: B Fitch: B+
Moody’s Investors Service has placed the B3 general obligation (GO) rating of the Chicago Board of Education, IL (CPS) under review for possible downgrade. The action applies to $5.4 billion of rated GO alternate revenue source bonds, and $159 million of GO lease revenue bonds an was prompted by the State of Illinois’ ongoing failure to provide timely operating aid to the district. Delayed categorical grant payments, which were due to CPS in fiscal 2017, total $466.5 million. The state’s timeframe for remitting those payments to the district remains uncertain. The action was taken before the General assembly enacted a budget for FY 2018 for the State. The district’s GO alternate revenue debt, which comprises the vast majority of the district’s outstanding GO debt, incorporates the district’s covered abatement alternate revenue debt structure, in which a levy is automatically extended for debt service if the district does not deposit the alternate revenue (mainly state aid) with the trustee in advance of debt service.
PENNSYLVANIA TURNPIKE COMMISSION
Turnpike Subordinate Revenue Bonds
The Moody’s rating reflects “the Commission’s strong and well-established market position with a history of relatively inelastic demand in response to annual rate increases and a proven willingness to annually raise toll rates at above inflation levels for several years in order to ensure targeted financial metrics are met. The annual rate increases help support annually rising debt levels for both system capital investments and non-system needs under Act 44. The ratings also reflect the turnpike system’s essentiality as a key east-west transportation corridor in the eastern US with a very long operating history and well-managed financial operations with consistently strong senior lien debt service coverage ratios (DSCRs) and a satisfactory liquidity position. The ratings incorporate a degree of expected traffic and revenue (T&R) underperformance over the long-term, albeit not material given increasingly strong traffic and revenue growth over the last couple of years related to low gas prices and economic growth.”
THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY
The Port Authority has been at the center of much controversy over a variety of projects in which it is involved. Whether it be traffic issues around the LaGuardia Airport reconstruction, issues regarding the location of and funding for a new Port Authority Bus Terminal, issues regarding the long term future of Kennedy Airport, and general governance issues stemming from efforts by the State of New Jersey to skew the benefits of the regional authority to projects in New Jersey. Fortunately, these issues have not been enough to overwhelm the Authority’s ratings on its flagship Consolidated Bond credit.
The Moody’s rating “benefits from the authority’s monopolistic control over critical transportation infrastructure assets in the economically diverse service area of NewYork/New Jersey including airport facilities and bridges and tunnels between New York City and New Jersey. The rating also reflects the authority’s track record of stable and solid financial performance with Moody’s senior debt service coverage (DSCR) around 2.1 times, Moody’s total DSCR around 1.9 times and debt to operating revenue close to 5.0 times on average from 2011 to 2016, good expenditure control and strong reserve levels.”
Moody’s explains that the rating could be higher but is influenced “by high execution risk associated with the authority’s large 10- year $32.2 billion 2017-2026 capital plan that was approved in February 2017. The capital plan is focused on financing revenue generating transportation assets rather than non-self-supporting development projects, which is positive. However, it includes capital projects of high complexity and substantial size which will require management resources and good control of project costs and risks. In addition, the funding for the capital plan will largely come from cash flow generation, existing liquidity reserves and bond debt financing, putting pressure on liquidity and debt levels in the next few years.”
Moody’s Investors Service has downgraded the rating for Puerto Rico Electric Power Authority’s (PREPA) approximately $8.0 billion in Power Revenue Bonds to Ca from Caa3. The outlook remains negative. According to Moody’s, the downgrade to Ca from Caa3 reflects PREPA’s decision on July 2nd to commence bankruptcy proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the July 3rd payment default on PREPA’s uninsured debt instruments, and the uncertainty regarding a future debt restructuring plan for PREPA, which has greatly increased and will impact the ultimate recoveries for bondholders.
The negative outlook reflects the likelihood that PREPA’s debt restructuring will be delayed given the number of entities filing for protection under PROMESA, which is likely to add more complexity to the process and that litigation, which has already been filed, will persist. Moody’s questions the ability of PREPA to execute on a sorely needed long-term capital investment program focused on converting oil-based power generation to natural gas, particularly given the challenging economic environment within the Commonwealth.
The original RSA contemplated 85% recovery rates for bondholders. Moody’s estimates that recoveries for creditors are more likely to fall in the 35-65% range.
The Illini probably hoped that the adoption of a balanced current budget for fiscal 2018 might take some of the pressure from the State’s ratings. In the case of Moody’s, that was not to be. In the midst of the contentious enactment and veto override process, Moody’s put the State’s Baa3 rating on review for downgrade.
We acknowledge that the deal struck was far from perfect and was only mildly bipartisan. Many of the assumptions included in the bill may not be realized but the result cannot be ignored. The budget adoption required hard political choices and overcame a well financed and highly personal effort by the Governor against the plan. The fact that the damage which could be done by a downgrade to below investment grade was acknowledged by the legislature has to be given some weight.
Frankly, we feel that the Moody’s review ignores the State’s political realities. Rarely has there been a governor so intransigent in terms of ideology and wealthy enough to personally undertake an extensive media campaign against such a necessary act of legislation. It will not be a surprise to see the relatively toxic political atmosphere in Illinois extend right on through the November 2018 elections.
One entity which could have hoped for downgrade relief was the City of Chicago. Given that it was reliant on legislative authority from the State to enact tax increases at the local level to partially address its substantial unfunded pension liabilities and that it finally received that authority, the Moody’s announcement of a negative outlook on the City’s rating had to be disappointing. That fact that it was largely based on the ongoing difficulties at the Chicago Public Schools adds to the City’s frustration.
All in all, it was a very unfulfilling week for these credits which probably deserved a little better.
California total revenues of $16.63 billion for June fell short of projections in the governor’s revised budget released two months ago by 2.5 percent. The 2017-18 fiscal year began July 1. For the fiscal year that ended June 30, total revenues of $121.91 billion missed May Revision estimates by $295.7 million, or 0.2 percent. The fiscal year total was $2.68 billion lower than anticipated in the 2016-17 budget signed last summer, with all of the “big three” revenue sources missing the mark.
For June, personal income tax (PIT) receipts of $10.94 billion were $161.0 million shy of May estimates, or 1.5 percent. For the fiscal year, PIT receipts of $82.72 billion were $1.05 billion lower than projections in the FY 2016-17 Budget Act, but lagged May estimates by just $196.3 million, or 0.2 percent. June corporation tax receipts of $2.42 billion were $344.4 million lower than anticipated in the May Revision, or 12.5 percent. The fiscal year total of $10.11 billion in corporation taxes was $885.6 million lower than FY 2016-17 Budget Act projections and $283.1 million less than expected in the May Revision. Retail sales and use tax receipts of $2.32 billion for June were $57.2 million, or 2.5 percent, higher than May estimates. For FY 2016-17, total sales tax receipts of $24.71 billion missed the original Budget Act projections by $1.03 billion; they topped May Revision assumptions by $126.7 million, or 0.5 percent.
California has not pursued external borrowing since FY 2014-15. The state ended last fiscal year with unused borrowable resources of $36.98 billion, which was $3.99 billion more than predicted in the governor’s May Revision. Outstanding loans of $4.84 billion were $1.64 billion lower than the Department of Finance’s May estimates. This loan balance consists of borrowing from the state’s internal special funds.
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