Muni Credit News July 18, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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$597,715,000

NEW JERSEY TURNPIKE AUTHORITY

Turnpike Revenue Bonds

Moody’s: A2  S&P: A+

The ratings were affirmed for this issue reflecting the facilities essential nature for both the state and the region’s transportation network. The Authority operates the New Jersey Turnpike, a 122-mile, limited-access toll road that serves as part of the Interstate 95 corridor and the Garden State Parkway, a 173-mile, limited-access toll road and essential route for in-state traffic. Both are passenger car dominated roads and the two roads are New Jersey’s largest and most critical surface transportation assets.  The credit reflects the State’s active oversight of its operations which can be a damper on revenues and coverage. Demand has proven to be inelastic in times of both recession and natural disaster.

The Authority does have significant future capital needs so in some periods debt service coverage softens as the political ratemaking process catches up. A five-year executed agreement with the state has limited the credit risk of growing contributions to the state as it sets contributions through 2021 at only $795 million compared to $1.53 billion over the previous five years. Bondholders are entitled to a first lien on net system revenues for the senior lien bonds. The general resolution requires a debt service reserve sized at maximum annual interest. Currently the debt service reserve requirement is 100% cash funded, including the interest on direct placement bonds and if all sureties are included the reserve is greater than current maximum annual debt service; however, two of the surety providers had their credit ratings withdrawn after strong credit distress. The rate covenant in the general resolution requires net revenue to be the greater of the sum of aggregate debt service, maintenance reserve payments, special project reserve payments, and payments to the charges fund, or 1.2 times the sum of aggregate debt service (including net swap payments and unhedged variable rate payments calculated at the maximum rate).

$1,349,265,000*

DORMITORY AUTHORITY OF THE STATE OF NEW YORK

STATE SALES TAX REVENUE BONDS

S&P: AAA

The bonds are secured by a dedication of state sales tax in an amount initially equal to a 1% tax rate. The dedication is made from within the state’s existing sales tax collection and does not represent an increase in the overall state tax rate. The dedicated tax is separate and distinct from the 1% sales tax securing bonds of the New York Local Government Assistance Corp. and a $170 million payment to New York City, which secures sales tax asset receivable corporation bonds outstanding. After all of LGAC’s obligations are paid or discharged, projected on or before 2025, the state sales tax dedicated to the sales tax revenue bonds will increase to a 2% rate of taxation.  The sales tax base providing revenue for the bonds is one of the largest and most diverse in the nation. The segregation provisions requiring the pledged funds to be held by the State Comptroller and the requirement that they be applied to debt service before being used for any other purpose provide excellent insulation from state operating variations.

$353,120,000*

GEORGIA STATE ROAD AND TOLLWAY AUTHORITY

FEDERAL HIGHWAY GRANT ANTICIPATION REVENUE BONDS

Moody’s: A2

FEDERAL HIGHWAY REIMBURSEMENT REVENUE BONDS

Moody’s: A1

The ratings are based on strong debt service coverage from pledged federal transportation aid, the long history of the federal aid highway program, and ongoing federal support of transportation infrastructure spending, factors that are offset by a large structural imbalance in the federal Highway Trust Fund (HTF) and authorization risk.

Grant Anticipation Revenue Bonds (GARBs) to an interruption in the flow of federal transportation aid, hence the lower rating. For the reimbursement revenue bonds, this risk is minimized because federal grants that are received continuously through the year are set-aside on a monthly basis in advance of debt service payment dates. The need to account for this risk reflects the entanglement of federal highway funding in increasingly frequent late enactment of a federal budget.

$307,000,000

State of New Mexico

Capital Projects General Obligation Bonds

Moody’s: Aa1

The State comes to market in the aftermath of a contentious FY 2018 budget process. Like many resource dependent states, the FY 2017 budget was adversely impacted. The state did take timely action to rebalance the fiscal 2017 budget and bolster reserves in response to lower revenue estimates released in December. The state established of a Rainy Day Fund to capture future growth in oil- and gas-related revenues, which should support budget discipline in periods of increasing revenue.

New Mexico’s general obligation bonds are secured by the full faith and credit of the state and specifically secured by and paid from a statewide unlimited property tax levy. The treasurer is required to keep the property tax proceeds separate from all other funds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature. If at any point there is not a sufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment.

The state’s GO bonds represent only a small portion of its net tax-supported debt . Severance tax backed bonds are the main financing vehicle. Pension funding levels are considered to be about average.

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GDB DEAL APPROVED

Puerto Rico’s financial control board announced it had “conditionally” certified a restructuring support agreement (RSA) between the island’s Government Development Bank (GDB) and its creditors. On June 30, the commonwealth government formally requested the board for certification of the RSA as a “qualifying modification,” as defined under Title VI of the federal statute. Approval would be the first use of a restructuring under Title VI. The plan would see the issuance of three tranches of bonds to creditors. Haircuts would hover from 25 percent to 45 percent, depending on the tranche, and GDB assets, particularly the municipal loan portfolio and real estate assets, would pay for these new bonds. In general, the higher the exchange ratio between the value of the current claim and the value of the new bonds, the lower the coupon rate.

Tranches A and B will be secured by a first lien on the assets to be transferred from GDB to the Issuer with respect to principal payments and will be entitled to amortizing principal payments from available cash on an equal basis. Tranche C will be secured by a second lien on the assets with respect to principal payments and, unless an event of default occurs, will not be entitled to any principal payments until Tranches A and B bonds are paid in full. Interest will be paid semi-annually on an equal basis on all three tranches to the extent of available cash from collections. Interest will be paid “in kind” if cash on the related semiannual payment date is insufficient.

The board’s press statement says it has “conditionally” certified the RSA but, no details were provided on the conditions to which the agreement’s approval is dependent. To take effect, the deal will need to be approved by a two-thirds vote of bondholders, as long as those voting in favor hold at least half of the bank’s debt.

TRANSIT FUNDING PROPOSAL RELEASED

Many providers of municipal transportation services have looked with trepidation at the upcoming budget process for fiscal 2018. It has been feared that their efforts at developing and maintaining mass transportation projects could be under threat if the Trump administration has its way. Those fears were mitigated a bit when the House Appropriations Committee today released the fiscal year 2018 Transportation, Housing and Urban Development funding bill.

In total, the bill reflects an allocation of $56.5 billion in discretionary spending – $1.1 billion below fiscal year 2017 and $8.6 billion above the administration’s request. The bill includes $17.8 billion in discretionary appropriations for the Department of Transportation for fiscal year 2018. This is $646 million below the fiscal year 2017 enacted level and $1.5 billion above the President’s request. In total budgetary resources, including offsetting collections, the bill provides $76.7 billion to improve and maintain our nation’s transportation infrastructure.

The bill provides $11.75 billion in total budgetary resources for the Federal Transit Administration (FTA) – $662 million below the fiscal year 2017 enacted level and $526 million above the request. Transit formula grants total $9.7 billion – consistent with the authorization level – to help local communities build, maintain, and ensure the safety of their mass transit systems. Within this amount, $1.75 billion is included for Capital Investment Grants, and $1 billion for “Full Funding Grant Agreement” (FFGA) transit projects.

Core capacity projects receive $145 million in the bill, $182 million is included to fund all state and local “Small Starts” projects, and $400 million is included for new projects that provide both public transportation and inner-city passenger rail service. These programs provide competitive grant funding for major transit capital investments – including rapid rail, light rail, bus rapid transit, and commuter rail – that are planned and operated by local communities. Bill language limits the federal match for New Starts projects to 50 percent.

Most public transit providers will be disappointed, as the legislation eliminates National Infrastructure Investment grants (also known as TIGER grants), which were funded at $500 million in fiscal year 2017.

NEW JERSEY BUDGET GIMMICKS CONTINUE

This week we were asked what we thought of the plan to transfer the State’s lottery assets to the State’s pension funds as a way of addressing its huge unfunded liability. We take the view that while it does represent a new asset to the pension fund, it takes its place in a long line of one shot gimmicks that the State has employed to fund pensions over the last two decades. Whether it was the ill fated 1997 pension fund bonding scheme, the bogus agreement in the first Christie term to fund pensions from general revenues which the State failed to adhere to, or this plan all were designed to insulate taxpayers from the consequences of bad pension decisions.

While it is not our place to support one technique over another, it is clear that the State’s credit and ratings will not recover until action’s are taken to fund annually required contributions in full from current revenues. If that requires new revenues, so be it. We acknowledge the political difficulty of raising taxes but the reality is that decisions have consequences and the need for new revenue for pensions is the consequence at hand.

At the same time, policy decisions from the Christie administration in any number of budget areas do not help to improve the environment. In the midst of one of its greatest periods of ongoing crisis, NJ Transit has decided to apply funds meant for much needed capital investment to subsidize operations. This time the transfer for fiscal 2018 will be just over $500 billion. This is not new for the Christie administration. While over $7 billion of such transfers for NJ Transit operations have been made since 1990, an estimated $3.4 billion have been made by the Christie administration.

Viewed in total, it is no surprise that the greatest deterioration in the state’s finances and ratings have occurred in the Christie administration. Investors will be thankful for term limits.

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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