Muni Credit News July 12, 2016

Joseph Krist

Municipal Credit Consultant


Over the Christie years, budget battles have been a primary characteristic influencing New Jersey’s bond ratings. One of the factors which was seen as a positive was the New Jersey Transportation Trust Fund credit and the constitutional provisions securing debt issued by that credit. Our view of reliance on legal versus economic supports for credits were enunciated in connection with Puerto Rico in our last issue.

So it was with dismay that we view the events of this week in connection with efforts to fund the New Jersey Transportation Trust Fund. Gov. Christie , a Republican, reached a deal with the Democratic-led State Assembly to raise the gas tax by 23 cents per gallon and to lower the sales tax. But Democratic leaders in the State Senate said they could not support the legislation because it would harm the state budget. The issue was that the sales tax cut would have reduced state by over $1 billion.

In response Gov.Christie’s administration declared a state of emergency and said that nonessential transportation projects would be suspended to conserve the money left in the state’s depleted transportation trust fund. The governor had directed the state transportation commissioner and the executive director of New Jersey Transit to submit plans for an “immediate and orderly shutdown” of most state-funded work. Projects with other sources of funding or that were deemed critical to safety were not affected.

Gov. Christie’s administration released a list of projects that will be shut down, saying they would be postponed for at least seven days. The 50-page list of transportation projects that will be shut down includes work in every corner of the state, from Bergen County in the north to Cape May at the southern tip. The State Transportation Department’s projects totaled $775 million, and New Jersey Transit’s projects added up to $2.7 billion.

The governor’s decision to shut down projects was highly unexpected prompting concerns over workers losing their jobs. State lawmakers had seen an opportunity to raise the gas tax ( the second lowest in the country), at 14.5 cents per gallon. There have been many suggestions that the tax be raised not just because of its low rate but based on the belief that users should pay more of the cost of road construction.

The volatile reaction by Mr. Christie is consistent with his habit of lashing out at those with opposing views. It also raises suspicions that his actions are being influenced by his vetting as a possible running mate for Donald J. Trump. This yet another example of an issue we have recently commented on(June 23) , namely the issue of political ideology as a credit negative.

Legislative Democrats are said to be examining several options for a transportation funding deal such as legislation to phase out the estate tax in exchange for raising the gas tax, but Mr. Christie said he did not support the idea.

As far as investors are concerned Transportation Trust Fund bonds are secured by the state’s absolute, unconditional contract payments subject to annual legislative appropriation. The state makes contract payments to the authority from the Transportation Trust Fund (TTF) account of the general fund. The accounts are funded with certain statutorily- and constitutionally-dedicated revenues for Transportation System bonds and with only constitutionally-dedicated revenues for Transportation Program bonds.

Bondholders have no direct lien on any of the dedicated revenues, and the legislature has no legal obligation to appropriate funds to the authority. Importantly, approximately 84% of New Jersey’s net tax-supported debt is subject to appropriation. The importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.


Fitch announced negative outlooks for Guam and U.S. Virgin Islands credits following the enactment of S.2328, the ‘Puerto Rico Oversight, Management, and Economic Stability Act’ or ‘PROMESA’ on June 30, 2016. According to Fitch, PROMESA fundamentally alters the premises used to rate certain tax backed debt issued by territorial governments distinct from and above a territory’s highest ratings.

In Fitch’s view, the adoption of PROMESA demonstrates the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection. Previously, territories were assumed to be like states which would not themselves be subject to insolvency proceedings. PROMESA creates a framework to allow an oversight board to initiate proceedings aimed at restructuring territorial tax backed debts as if the territory itself was a municipality.

This is along the lines of concerns that we expressed last week. The securities being placed on Rating Watch Negative have been higher than the general credit quality of the respective territories based on their legal security structures. While the PROMESA legislation seeks to preserve the relative rights of lien holders, provisions of Chapter 9 that would otherwise protect holders of specific tax backed liens from automatic stay provisions require further assessment according to Fitch in light of the new legislative scheme.

Fitch notes that although PROMESA does not establish an oversight board for territories other than Puerto Rico, our extension of the inherent logic of the act to the rating of the tax backed debt of other territories would be consistent with the approach taken when rating municipal debt in states where local governments are not currently authorized by state government to file proceedings under Chapter 9. Fitch notes that it makes no distinction between entities in states that allow for local government bankruptcies and those that do not based on Fitch’s belief that, if a state deemed an entity’s best option to be a filing, the state would make the legal provisions necessary for that entity to file. Fitch’s view is that the same approach should be taken with respect to the federal power to authorize territorial bankruptcy.


This year, the state legislature has sent a spending plan to the Governor for his signature not too many days past the deadline for enactment. The problem this time around is that they have not agreed on how to pay for it. If signed as is, the “budget” is short on the revenue side by over $1 billion. The legislators have yet to agree on new sources of funding. They are considering gambling revenues, a possible increase in the base for sales tax collections, or a cigarette tax increase (see May 31 and May 17 issues).

An increase in the sales tax base would likely include the retail sales of clothing. This would be unpopular on both sides of the transaction with obvious opposition from consumers but also from retailers and localities. Many border localities have been able to entice retailers to establish and even relocate from New York to Pennsylvania bringing jobs along with them. Any reduction in that competitive advantage would be viewed poorly by those localities.

The Governor has decided to sign the underfunded budget rather than risk an ongoing budget debacle while his state hosts his party’s National Convention. The recurring failure to adopt timely budgets along with the recurring failure address the Commonwealth’s structural budget issues (education, pensions, property tax relief) combine to sustain the Commonwealth’s downward rating trajectory. We view the Commonwealth’s credit as an underperformer for the foreseeable future.


In 1987, litigation was filed by the City of Chicago to establish what its legal obligation to fund the healthcare costs of its retirees. In many ways it was a forward thinking step. Other post-employment benefits as a source of credit pressure have really come to the fore since the turn of the century. Prior to that time, they were not a prime consideration for most investors. This step by the City has not been the stabilizing factor it hoped it would be.

Since 1988 the City of Chicago and its four pension funds have been party to the settlement of City of Chicago v. Korshak regarding how much the City, the funds and annuitants pay for healthcare. Much has changed in the time since that settlement which expired on June 30, 2013. Over that time, the City’s fiscal position worsened, a new administration took over in the City, and the Affordable Care Act was enacted. These factors led the City to seek ways to try to eliminate City support for retiree healthcare benefits. The City had hoped to rely on the fact that beginning in 2014, under the ACA, non-Medicare eligible retirees would be able to access insurance through new regulated marketplaces, or exchanges. The ACA increases access for retirees not yet eligible for Medicare by outlawing practices that previously made finding healthcare coverage difficult.

The City has been reducing subsidies for retiree healthcare costs since 2013. The retirees are now challenging Chicago’s efforts to phase out most retiree healthcare subsidies – or other post-employment benefits — which had cost the city about $100 million annually. They argue the benefits are protected by the state constitution’s pension clause and that the city is seeking to breach its contract with retirees. That position is based on a 2014 decision from the Illinois Supreme Court (Kanerva v. Weems) in which the court did not rule on whether changes the state made to retiree premium subsidies actually impaired retiree benefits, just that they are protected under the state constitution pension clause which gives benefits contractual protections against being impaired or diminished.

The Cook County Circuit Court heard oral arguments on July 6. It is  expected to issue a ruling on the city and pension funds’ motion to dismiss in the next two weeks. This will not be the final step in the process as both sides are interested in a certain outcome. That will undoubtedly come through an appeal to the Illinois Supreme Court. There is much riding on the outcome for the City and its investors.

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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